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at  da  haut  »n  bas,  en  prenant  la  nombre 
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(ANSI  and  ISO  TEST  CHART  No    2) 


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^     >1PPLIED  IIV1/1GE 


1653   East   Mam   Street 

Roctiesfer,   New   York         14609       USA 

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THE  VALUE  OF  MONEY 


THE  MACMILLAN  COMPANY 

mw  YORK  •   BOiTOM  •   CHICAGO   ■  DAUAI 
ATLANTA   •   SAN  FRANCISCO 

MACMILLAN  &  CO..  Lhhted 

LONDON   •  BOMBAY   ■  CALCUTTA 
llELBOUKNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltb. 

TORONTO 


THE 
VALUE  OF   MONEY 


BY 


B.  M.  ANDERSON,  JR.,  Ph.  D. 

ASSISTANT  PROFESSOR  OF  ECONOMICS,  HARVARD  UNIVERSITY 


AUTHOR  OF  "  SOCIAL  VALUE 


.iC 


N»tti  fork 

THE  MACMILLAN  COMPANY 

1917 

All  rights  reserved 


COPYRKIHT,    l*)!? 

Hv   IIIK  MM  Mll.UW  (OMl'AW 
Set  up  ar.il  clcctrotypcd.    Published  May,  1917. 


B.  M.  A.,  Ill 

AND 
J.    C.    A. 

WHO  OFTEN  INTJ:KRUPTED  THE  WORK 
BUT     NONE     THE     LESS     INSPIREIi     IT 


PREFACE 


The  following  pages  have  as  their  central  problem  the 
value  of  money.  But  the  value  of  money  cannot  be  studied 
successfully  as  an  isolated  problem,  and  in  order  to  reach 
conclusions  upon  this  topic,  it  has  been  necessary  to  con- 
sider virtually  the  whole  range  of  economic  theory;  the 
general  theory  of  value;  the  rdle  of  money  in  economic 
theory  and  the  functions  of  money  in  economic  life;  the 
theory  of  the  values  of  stocks  and  bonds,  of  "good  will," 
established   trade  connections,   trade-marks,   and   other 

intangibles";  the  theory  of  credit;  the  causes  governing 
the  volume  of  trade,  and  particularly  the  place  of  specula- 
tion in  the  volume  of  trade;  the  relation  of  "static"  eco- 
nomic theory  to  "dynamic"  economic  theory. 

"Dynamic  economics"  is  concerned  with  change  and 
readjustment  in  economic  life.  A  distinctive  doctrine  of 
the  present  book  is  that  the  great  bulk  of  exchanging  grows 
out  of  dynamic  change,  and  that  speculation,  in  particular, 
constitutes  by  far  the  major  part  of  all  trade.  From  this 
it  follows  that  the  main  work  of  money  and  credit,  as  instru- 
ments of  exchange,  is  done  in  the  process  of  dynamic  read- 
justment, and,  consequently,  that  the  theory  of  money  and 
credit  must  be  a  dynamic  theory.  It  follows,  further,  that  a 
theory  like  the  "quantity  theory  of  money,"  which  rests  in 
the  notions  of  "static  equilibrium"  and  "normal  adjust- 
ment," abstracting  from  the  "transitional  process  of  read- 
justment," touches  the  real  problems  of  money  and  credit 
not  at  all. 

This  thesis  has  seemed  to  require  statistical  verification, 
and  the  effort  has  been  made  to  measure  the  elements  in 


vu 


VIU 


PREFACE 


trade,  to  assign  proportions  for  retail  trade  and  for  wh(>lesalc 
trade,  to  obtain  indicia  of  the  extent  and  variation  of 
speculation  in  securities,  grain,  and  other  things  on  the 
organized  exchanges,  and  to  indicate  something  of  the 
extent  of  less  organized  speculation  running  through  the 
whole  of  business.  The  ratio  of  foreign  to  domestic  trade 
has  been  studied,  for  the  years,  1890-1916. 

The  effort  has  also  been  made  to  determine  the  magni- 
tudes of  banking  transactions,  a.nd  the  relation  of  banking 
transactions  to  the  volume  of  trade.  The  conclusion  has 
been  reached  that  the  overwhelming  bulk  of  banking 
transactions  occur  in  connection  with  speculation.  The 
effort  has  been  made  to  interpret  bank  clearings,  both  in 
New  York  and  in  the  country  outside,  with  a  view  to 
determining  quantitatively  the  major  factors  tiiat  give  rise 
to  them. 

In  general,  the  inductive  study  would  show  that  modern 
business  and  banking  centre  about  the  stock  market  to  a 
much  greater  degree  than  most  students  have  recognized. 
The  analysis  of  banking  assets  would  go  to  show  that  the 
main  function  of  modern  bank  credit  is  in  the  direct  or 
indirect  financing  of  corporate  and  unincorporated  industry. 
"Commercial  paper"  is  no  longer  the  chief  banking  asset. 

It  is  not  concluded  from  this,  however,  that  commerce 
in  the  ordinary  sense  is  being  robbed  by  modern  tendencies 
of  its  proper  banking  accommodation,  or  that  the  banks  are 
engaged  in  dangerous  practices.  On  the  contrary  it  is 
maintained  that  the  ability  of  the  banks  to  aid  ordinary 
commerce  is  increased  by  the  intimate  connection  of  the 
banks  with  the  stock  market.  The  thesis  is  advanced  - 
though  with  a  recognition  of  the  i)ulitical  difficulties  in- 
volved—that the  Federal  Reserve  Banks  should  not  be 
forbidden  to  rediscount  loans  on  stock  exchange  collateral, 
if  they  are  to  perform  their  best  services  for  the  country. 


PREFACE 


IX 


The  ciuantity  theory  of  money  is  examined  in  detail,  in 
various  formulations,  and  the  conclusion  is  reached  that  the 
quantity  theory  is  utterly  invalid. 

The  theory  of  value  set  forth  in  Chapter  I,  and  pre- 
supposed in  the  positive  argument  of  the  book,  is  that 
first  set  forth  in  an  earlier  book  by  the  present  writer,  Socid 
Value,  published  in  191 1.  That  book  grew  out  of  earlier 
studies  in  the  theory  of  money,  in  the  course  of  which  the 
writer  reached  the  conclusion  that  the  problem  of  money 
could  not  be  solved  until  an  adequate  general  theory  of  value 
should  be  developed.  The  present  book  thus  represents 
investigations  which  run  through  a  good  many  years,  and 
to  which  the  major  part  of  the  past  six  years  has  been 
given.  On  the  basis  of  this  general  theory  of  value,  and  a 
dynamic  theory  of  money  and  exchange,  our  positive  con- 
clusions regarding  the  value  of  money  are  reached.  On  the 
same  basis,  a  psychological  theory  of  credit  is  developed,  in 
which  the  laws  of  credit  are  assimilated  to  the  general  laws 
of  value. 

In  a  final  section,  the  constructive  theory  of  the  book  is 
made  the  basis  for  a  "reconciliation"  of  "statics"  and 
"dynamics"  in  economic  theory — an  effort  to  bring  to- 
gether the  abstract  theory  of  price  (i.  e.,  "statics")  which 
has  hitherto  chiefly  busied  economists,  and  the  more  realis- 
tic studies  of  economic  change  {i.  c, "  dynamics  ")  to  which  a 
smaller  number  of  economists  have  given  their  attention. 
These  two  bodies  of  doctrine  have  hitherto  had  little  con- 
nection, and  the  science  of  economics  has  suffered  as  a 
consequence. 

This  book  was  not  written  with  the  college  student  pri- 
marily in  mind.  None  the  less,  I  incline  to  the  view  that 
the  book,  with  the  exception  of  the  chapter  on  "Marginal 
Utility."  is  suitable  for  use  as  a  text  with  juniors  and  seniors 
in  money  and  banking,  if  supplemented  by  some  general 


PREFACE 


descriptive  and  historical  book  on  the  subject,  and  that  the 
whole  book  may  very  well  be  used  with  such  students  in 
advanced  courses  in  economic  theory.  I  think  that  barJiers, 
brokers,  and  other  business  men  who  are  interested  in  the 
general  problems  of  money,  trade,  speculation  and  credit, 
will  find  the  book  of  use.  Naturally,  however,  it  is  my  hope 
that  the  special  student  of  money  and  banking,  and  the 
special  student  of  economic  theory  will  find  the  book  of 
interest.  The  book  may  interest  also  certain  students  of 
philosophy  and  sociology,  who  are  concerned  with  the 
applications  of  philosophy  and  social  philosophy  to  concrete 
problems. 

My  obligations  to  others,  running  through  a  good  many 
years,  are  very  great.  With  Professor  E.  E.  Agger,  I  talked 
over  very  many  of  the  problems  here  discussed,  in  the 
course  of  two  years  of  close  association  at  Columbia  Univer- 
sity, and  gained  very  much  from  his  suggestions  and  crit- 
icisms. Professor  E.  R.  A.  Seligman  has  read  portions  of 
the  manuscript,  and  given  valuable  advice.  Professor  H.  J. 
Davenport  has  given  the  first  draft  an  exceedingly  careful 
reading,  and  his  criticisms  have  been  especially  helpful. 
Professor  Jesse  E.  Pope  supervised  my  investigations  in  the 
quantity  theory  of  money  in  1904-5,  in  his  seminar  at  the 
University  of  Missouri,  and  gave  me  invaluable  guidance  in 
the  general  theory  of  money  and  credit  then.  More  re- 
cently, his  intimate  first  hand  knowledge  of  European  and 
American  conditions,  both  in  agricultural  credit  and  in 
general  banking,  has  been  of  great  '-ervice  to  me.  Mr.  N.  J. 
Silberling,  of  the  Department  of  Economics  at  Harvard 
University,  has  been  helpful  in  various  ways,  particularly 
by  making  certain  statistical  investigations,  to  which 
reference  will  be  made  in  the  text,  at  my  request.  Various 
bankers,  brokers,  and  others  closely  in  touch  with  the  sub- 
jects here  discussed  have  been  more  than  generous  in  supply- 


PREFACE 


ing  needed  information.    Among  these  may  be  especially 
mentioned  Mr.  Byron  W.  Holt,  of  New  York,  Mr.  Osmund 
Phillips,  Editor  of  the  Annalist  and  Financial  Editor  of  the 
New  York  Times,  Messrs.  L.  H.  Parkhurst  and  W.  B.  Don- 
ham,  of  the  Old  Colony  Trust  Company  in  Boston,  various 
gentlemen  in  the  offices  of  Charles  Head  &  Co.,  and  Pear- 
main  and  Brooks,  in  Boston,  Mr.  B.  F.  Smith,  of  the  Cam- 
bridge Trust  Company,  Mr.  W.  H.  Abom,  Coffee  Broker, 
New  York,  Mr.  Burton  Thompson,  Real  Estate  Broker,  New 
York,  Mr.  Jas.  H.  Taylor,  Treasurer  of  the  New  York 
Coffee  Exchange,  Mr.  J.  C.  T.  Merrill,  Secretary  of  the 
Chicago  Board  of  Trade,  DeCoppet  and  Doremus,  New 
York,  and  Mr.  F.  I.  Kent,  Vice  President  of  the  Bankers 
Trust  Company,  New  York.    My  greatest  obligations  are 
to  two  colleagues  at  Harvard  University.    Professor  F.  W. 
Taussig  has  given  the  manuscript  very  careful  considera- 
tion, from  the  standpoint  of  style  as  well  as  of  doctrine,  and 
has  discussed  many  problems  with  me  in  detail.    Professor 
O.  M.  W.  Sprague  has  placed  freely  at  my  service  his  rich 
store  of  practical  knowledge  of  virtually  every  phase  of 
modern  money  and  banking,  and  has  read  critically  every 
page  of  the  manuscript.   None  of  these  gentlemen,  of  course, 
is  to  be  held  responsible  for  my  mistakes.    I  also  make 
grateful  acknowledgment  of  the  aid  and  sympathy  of  my 
wife. 

In  the  course  of  the  discussion,  frequent  criticisms  are 
directed  against  the  doctrines  of  Professors  E.  W.  Kemmerer 
and  Irving  Fisher,  particularly  the  latter,  as  the  chief 
representatives  of  the  present  day  formulation  of  the 
quantity  theory.  Both  their  theories  and  their  statistics 
are  fundamentally  criticised.  I  find  myself  in  radical  dis- 
sent on  all  the  main  theses  of  Professor  Fisher's  Purchasing 
Power  of  Money,  and  at  very  many  points  of  detail.  To  a 
less  degree,  I  find  myself  unable  to  concur  with  Professor 


xu 


PREFACE 


Kemmerer.  But  I  should  be  sorry  if  the  reader  should  feel 
that  I  fail  to  recognize  the  distinguished  services  which 
both  of  these  writers  have  performed  for  the  scientific  study 
of  money  and  banking,  or  should  feel  that  dissent  precludes 
admiration.  I  acknowledge  my  own  indebtedness  to  both, 
not  alone  for  the  gain  which  comes  from  having  an  opposi  -^ 
view  clearly  defined  and  ably  presented,  but  also  for  mutb 
information  and  many  new  ideas.  My  general  doctrinal 
obligations  in  the  theory  of  money  and  credit  are  far  too 
numerous  to  mention  in  a  preface.  My  greatest  debt  in 
general  economic  theory  is  to  Professor  J.  B.  Clark. 

B.  M.  Anderson,  Jr. 

Harvard  University,  March  31,  1917. 


ANALYTIC\\L  TABLE  OF  CONTENTS 


PART  I.     THE  VALUE  OF  MONEY  AND  THE  GENEILIL 
THEORY  Of  VALUE 

CHAPTER  I 


ECONOMIC  VALUE 


PAGE 


Problem  of  value  of  money  si^ecial  case  of  general  theory  of 

value ;  present  chapter  concerned  with  general  theory ...  i 

Formal  and  logical  aspects  of  value:  value  as  quality;  value 

as  quantity;  value  and  wealth 3-6 

Absolute  vs.  relative  conceptions  of  value:  value  of  money  vs. 
"reciprocal  of  price-level";  value  prior  to  exchange; 
value  and  exchangeability;  do  prices  correctly  express 
values? •        6-12 

Doctrine  so  far  in  accord  with  main  current  of  economic 

opinion 12-14 

Causal  theory  of  value  new:  marginal  utility,  labor  theory, 

etc.,  rejected 14-16 

Social  explanation  required:  "individual"  a  social  product, 

both  in  history  of  individual  and  in  history  of  race  16-19 

And  above  individual  impersonal  psychic  forces,  law,  public 

opinion,  morality,  economic  values 19-20 

Three  types  of  theory  have  dealt  with  these:  theovv  of  extra- 
human  objective  forces;  extreme  individualism;  social 
value  theorv' 20-21 

Illustrated  in  jurisprudence,  ethics,  and  economic  theory  2 1-26 

Law,  morals,  and  economic  values  generically  alike,  but  have 

diferenlue 26-28 

But  not  differentiated  on  basis  of  states  of  consciousness  of 
individunl  immediately  moved  by  them,  because  many 
minds  in  organic  interplay  involved 28-33 


Xiv  ANALYTICAL   TABLK    OF   CONTENTS 

PAGE 

Economic  social  value  (a)  of  consumers'  goods  and  services: 
"utility"  and  scarcity;  "marginal  utility":  social  ex- 
planation of  marginal  utility;  marginal  utilities  the  con- 
scious/(»f«5  of  economic  values  of  consumers'  goods;  but 
only  minor  piirt  of  these  values;  individuals,  classes  and 
institutions  heavily  weighted  by  legal,  moral,  and  other 
social  values,  in  power  over  economic  values  of  con- 
sumers' goods .?3~3° 

Economic  social  value  (b)  of  labor,  land,  stocks,  bonds, 
"good  will,"  etc.;  based  only  in  part  on  values  of  con- 
sumers' goods;  partially  independent,  directly  influenced 
by  contagion,  and  centers  of  power  and  prestige .^8-41 

Pragmatic  character  of  theory 4i-43 

Relation  of  social  values  to  individual  values 43~45 

CH.'VPTER  II 

SUPPLY  AND  DEMAND,  AND  THE  VALUE  OF  MONEY 

Hiatus  between  general  theory  of  value  and  theory  of  value  of 

money 46-47 

Partly  because  former  has  been  developed  by  different  writ- 
ers from  those  who  have  developed  latter 47-49 

But  chiefly  because  supply  and  demand,  cost  of  prtxiuction, 
etc.,  assume  fixed  value  of  money,  and  arc  theories  of 
price,  rather  than  value 49 

Supply  and  demand  useful  but  superficial  formula,  common 

property  of  many  value  theories 49-5° 

Crude  and  unanalyzed  in  Smith  and  Ricardo;  first  made 
precise  by  J.  S.  Mill,  who  gives  essentials  of  modern 
doctrine 49-51 

Bohm-Bawerk's  pseudo-psychology  spoils  Mill's  clean-cut 

doctrine S1-S2 

Supply  and  demand  assumes  fixed  value  of  money-unit,  and 

hence  inapplicable  to  money  itself 52-56 

But  supply  and  demand  does  not  assume  fixed  price-level     .       s6-.S7 

Caimes  vs.  Mill 57-58 

Mill's  unsuccessful  effort  to  apply  supply  and  demand  to 

money 59-02 

Walker's  attempt 62 

Supply  and  demand  in  the  "  money  market " 62-63 


ANALYTICAL  TABLE   OF   CONTENTS  XV 

CHAPTER  III 

COST  OF  PRODUCTION  AND  THE  VALUE  OF  MONEY 

FACE 

Types  of  cost  theory:  modern  cost  doctrine  is  "  money  costs  " 

doctrine,  and  inapplicable  to  value  of  money 64 

Labor  cost:  Smith;  Ricardo;  Ricardo's  confession  of  failure; 
"real  costs"  in  Senior  and  Cairnes;  Mill's  "money- 
outlay"  cost  doctrine,  and   Cairnes'   criticism;  but 

"money-cost"  has  survived 64-67 

Because  "  real  cost "  doctrine  does  not  square  with  facts 67-69 

"Money-cost"  of  producing  money-metal 69-70 

Austrian  cost  doctrine  runs  still  in  money  terms,  assuming 

value,  money,  and  fixed  value  of  money 70~7i 

"Negative  social  values"  as  "real  costs" note,  71 

CHAPTER  IV 

THE  CAPITALIZATION  THEORY  AND  THE  VALUE  OF  UONEY 

Money  as  "capital  good,"  and  "money-rates"  as  rentals.  72-73 

Capitalization  theory;  formula;  capital  value  passive  re- 
sultant of  annual  income  and  rate  of  discount 73~74 

But  in  case  of  money,  rental  and  rate  of  discount  not  in- 
dependent variables 74~76 

And  in  case  of  money,  capital  value  not  passive  shadow,  but 

active  cause  of  income 76 

Capitalization  theory  assumes  money,  and  fixed  value  of 

money 76-77 

Assumed  fixed  value  of  money  absolute,  and  not  relative 77-78 

Capitalization  theory,  in  current  formulation,  inapplicable 

to  value  of  money 7^-79 

CHAPTER  V 

MARGINAL   UTILITY  AND  THE  VALUE  OF  MONEY 

Marginal  utility  theory  usually  thinly  disguised  version  of 

supply  and  demand,  and  hence  inapplicable  to  mone\' .  80 

View  that  money  is  unique  in  having  no  utility  per  se 81-83 


^  ANALYTICAL   TAHLE   OF   COXTENTS 

Marginal  utility  and  "commoclity  thcoo^ "  of  monev-valuc .         sTfH 
Quantuy  tht-onsts  and  marginal  utility  of  money  '  x    «! 

Money  an  instrumental  g.HKl.  and  marginal  utili.v  „o  less 
applicable  here  than  elsewhere;  marginal  utililV  invalid 
as  general  theory  of  value,  hence  invalid  when  a.nli^l  i,, 
money 

Wieser's  theory  of  value  of  money .  ...'.'.' ^''"° 

A  circle  in  reasoning -^ 

Schumpetcr's  similar  circle          ^^~^ 

But  Schumpeter's  general  utility  thtn^ry,' though  inapplicable  '°° 

to  value  of  money,  in  form  avoids  a  caused  circle. .  oo-t.S 
Schumpeter  sconspecius;  diflferent  irom  Bohm-Hawerk  ami 

most  utuity  theorists 

Defects  and  limitations  of  Schumpeter's  general  theorT"''  '  '^08 

Schumpeter's  substitutes  for  social  value  concept ...  ,Too 

V  on  M:sc^  sees  circle  of  Wieser  and  Schumpeter .            " ' ' '  ^\!! 
Seeks  to  avoid  it  by  construing  utility  theory  as  historical 
mstead  of  static,  theory ... 

But  tWs  departs  from  fundamentals  of  utility  theory;  other  '''' 

diliiculties .  ... 

Kinley's  doctrine. ...".".'.'.'.'.'.'...'.'.'.' ' '"'""^ 

General  criticism  of  utility  theory "o-m 

Davenport,  Wicksteed,  Fisher,  Perrv    " '""S 

•^ 113-120 

PART  II.    THE  QUANTITY  THEORY 
CHAPTER  VI 

THK  QUANTITY  THEORY  OF  PRICES.     INTRODUCTION 

Preliminary  statement  of  quantity  theory,  and  of  critical 
theses  to  be  developed  in  following  chapters.  Virtually 
every  contention  and  every  assumption  of  quantitv 

theory  to  be  challenged. 

*         1-23-129 

CHAPTER  Va 

DODO-BONES 

Quantity  theory  doctrine  that  valueless  objects  can  serve  as 
money;  Nicholson's  assumption:  monev  made  .,f  ,lodo- 

(M>nes 

130-131 


ANALYTICAL  TABLE  OF  CONTENTS 


xvii 


PAGE 

Fisher's  view  also '3° 

And  Ricardo's i3«-i3i 

Will  dodo-bones  circulate?    Dodo-bones  and  poker  chips; 

circular  reasoning '3* 

Both  medium  of  exchange  and  standard  of  value  must  be 

valuable ''33 

Is  inconvertible  paper  an  exception? ^ 133"' 34 

Doctrine  that  money  gives  legal  claim  to  things  in  general.  134 

Kemmerer's  assumptions;  money  made  of  commodity,  once 

valuable,  now  used  only  as  money i35 

Commotlity  thtx)ry  requires  present  commodity  value 13S 

Historical  vs.  cross-section  view:  possibility  that  such  money 

would  circulate i35~'36 

Value  not  tied  up  with  marginal  utility  or  commodities: 
social  value  theory;  derived  values  often  become  in- 
dependent of  original  presuppositions,  in  economic  as 

well  as  legal  and  moral  spheres 136-139 

But  this  no  basis  for  quantity  theory:  Focial  psychology,  not 

mechanics '30 

"Banker's  psychology"  vs.  psychology  of  blind  habit:  India, 
Austria,  Unitet'.  States;  monetary  phenomena  of  war 

times;  "credit  heory"  of  Greenbacks 139-142 

Question-begging  dcilnition? 142-143 

Assumptions  of  quantity  theory:  blind  habit  and  fluid  prices  143-144 
Extreme  commodity  theory  denies  that  money-use  adds  to 
value  of  money;  usually  not  true;  analysis  of  money- 
functions  144-150 

Hypothetical  case  in  which  whole  value  of  money  comes  from 

commodity  value.    iS<>-iS2 

Money  must  have  value  apart  from  monetary  employments, 
but,  in  general,  gains  additional  value  from  employ- 
ment as  money 152-1 53 


CHAPTER  VIII 

THE  "equation  OF  EXCHANGE" 

Fisher   leading,    most    consistent,    most    uncompromising 

quantity  theorist:  wide  acceptance  of  his  views 

Taussig  vs.  Fisher 


154 
IS5 


Xviii  ANALYTICAL   TABLE   OF   CONTENTS 

PAGE 

l-ishtr  and  (lodo-bone  doctrine:  logical  part  of  quantity  i 

theory;  Fisher's  value  concept 155-156 

"  Equation  of  exchange  ":  analysis  of  Fisher's  version,  typical 

,      "f"" 156-.71 

In  what  sense  equality  between  two  sides  of  equation?  Mean- 

,,     inRof'T" ,38-16. 

No  "goods  side"  to  equation;  both  sides  sums  of  money; 

equal  because  identical;  equation  meaningless i6i-i6i 

All  factors  in  equation  highly  abstract 162-163 

"P"  and  "T"  cannot  both  be  given  independent  definitions: 

P  defined  ns  wig/ited  average,  with  T  in  denominator; 

and  must  be  changed  from  year  to  year,  as  elements  in  T 

change,  even  though  no  prices  change 164-166 

This  makes  circular  theory:  problem  defined  in  terms  of  ex- 

^     P'<""'l'o>i ,65-j66 

Causal  theory  associated  with  equation  of  exchange 166 

Equation  amplified   to  include  credit;  not  acceptable  to 

Nicholson  or  Walker,  and  caricature  of  conditions  in 

Germany  and  France 166-1-0 

Book-credit,  bills  of  exchange,  etc.,  excluded 167-170 

Why  a  one-year  period? 170-171 


CHAPTER  IX 

TIIE  VOLUME  OF  MONEY  AND  THE  VOLUME  OF  CREDIT 

Mill  thought  credit  acts  on  prices  like  money,  and  that  this 
reduces  quantity   theory   tendency   to   indeterminate 
degree;  Fisher  holds  volume  of  money  in  circulation  gov- 
erns volume  of  credit,  so  that  quantity  theory  stands ....  172 
Fisher's  arguments  for  fixed  ratio,  money  to  bank-deposits ...    1 7  2-1 73 

Argument  a  non-scqiiitiir,  even  if  contentions  true 173-177 

Contentions  untru'':  no  fixed  ratio  between  reserves  and  de- 
posits, or  reserves  and  demand  liabilities,  cither  in 

America  or  Europe 177-182 

Taussig's  views;  virtually  surrender  of  quantity  theory  in 

modem  conditions 182-18? 

Bulk  of  quantity  theorists  in  between  Fi.sher  and  Taussig, 

but  nearer  to  Fisher's  view  than  to  Taussig's 185 


ANALYTICAL  TABLE   OP  CONTENTS 


XIX 


CHAPTER  X 

"NORMAt"  VS.   "TBANSITIONAL"  TENDENOES 
-  .        .  PAOE 

Quantity  thcon-  qualihed  by  distinction  between  "normal" 
and  "transitional"  effects  of  change  in  quantity  of 

money,  etc ,gg 

Meaning  of  distinction,  and  extent  of  qualification  hard  to 
determine:  is  "normal  period"  real  period  in  time? 
How  long  is  "transitional  period"?  Is  it  realistic,  or 
hypothetical?  Is  equation  of  exchange  realistic?  Con- 
crete vs.  hypothetical  price-levels i86-iSq 

Legitimate  and  illegitimate  abstraction iSg-igo 

Causation  and  temporal  order ino-im 

Fisher  admits  very  slight  qualification  of  "normal  theory".  192 

Mill's  quantity  theory  "short  run"  theory;  Taussig's  "long 

run"  theory;  radically  different  logic  in  the  twij 192-193 

Fisher's  theory  sometimes  "long  run  "  and  sometimes  "short 

run    ,- .  ,__ 

194-195 


HAPTER  XI 

BARTER 

Quantity  theory  spoiled  if  resort  to  barter  possible  and  im- 
portant   

Extent  of  barter  and  other  flexible  substitutes  for  money  and 
bank-credit;  simple  barter;  different  methods  of  corpo- 
rate consolidations;  flexibility,  with  state  of  money- 
market;  clearing-house  arrangements  in  speculative  ex- 
changes; offsetting  book-credits igy- 

Barter  made  easier  under  money  economy,  by  measure  of 
value  function  of  money 

Bills  of  exchange;  foreign  trade 


196 


200 

20t 
30x 


CHAPTER  XII 

VELOCITY  OF  CIRCULATION 


Velocity  conceived  by  quantity  theory  as  causal  entity,  in- 
dependent of  quantity  of  money  and  prices;  necessary 
assumption  for  law  of  proportionality 


203 


XX  ANALYTICAL    TABLE    C)P   CONTENTS 

PAGE 

"Coin-transfer"  vs.  "pcrson-turnoviT"  cona-pts ■?0,i-jO4 

Vclixity  really  nuii-t-asfntial  by-pro<lutl,  nifaningli's.s  aviragc  i04  ,105 
Dottrinc  that  vclwity  indepi'ndent  of  motu-y;  hal)it  and  con- 

venicnie;  hoardinK;  h«»ar(linK  by  banks    ios-JCX) 

Vi'Iority  and  volume  of  trade;  vary  tojji  iher 200  .J  14 

Value  of  money  lausiilly  governs  velocity 214-215 

CHAPTER  XIII 

THE  VOLUME  OF  MONEY   AND   THE   VOLUME   OF   TRADE— TRADE   AND 

SPECULATION 


Quantity  theory  doctrine  that  volume  of  trade,  and  volume 
of  money  (and  credit).  ,ire  independent;  trade  governed 
by  physical  and  technical  conditions,  not  money 

View  that  quantity  of  money  vitally  affects  pro<luction  and 
trade 

Walker,  Sombart,  Withers,  Price,  Holt 

Increase  of  money  increases  trade,  even  on  static  theory: 
increase  of  money  increase  of  capital;  lowered  margin  in 
exchanges;  money-rates  and  interest;  money  tool  of 
exchange;  elasticity  of  demand  for  money -service;  in 
Arizona  and  \ew  ^'ork  City 

Trade  distinguished  from  production  and  from  stock 

Trade  chiefly  speculation;  Fisher's  $,^87, 000,000,000  of  trade 
in  l^  S.  in  loog  analyzed;  index  of  variation  in  trade; 
figure  based  on  Kinley's  returns  from  12,000  banks; 
double-counting 

Figure  largely  represents  speculation;  statistics  of  total 
wealth  of  U.  S.;  small  role  of  wholesale  and  retail  de- 
posits; "all  other  deposits"  bunched  in  speculative  cen- 
ters, especially  New  York;  trifling  "deposits"  in  country 
banks;  evidence  of  bank-clearings:  clearings  and  stock 
speculation;  clearings  and  ordinar>' business 

Measurement  of  "ordinar>'  trade" 

Volume  of  stock  speculation 

Commodity  speculation 

Unorganized  speculation 

Bill  and  note  speculation 


216-210 

219 

219-222 


222-225 
225-226 


227-2JO 


230-241 
241-248 
248-251 
251-252 
252-254 
255 


ANALYTICAL  TABLE  OF  CONTENTS 


XXi 


FACE 


lishi-r's  ind  Kemmcrcr's  indicia  of  trade  variation  wholly 

misk-ailiriK '.S5~357 

l'ro<iuit.on  wuits  on  trade;  sc-liinj?  costs  vs.  "cost  of  produc- 
tion"; "kixxI  will";  are  banks  useless? 257-^6* 

"Normal  vs.  transitional":  statiis  r.v.  dynamics;  money  and 
cre<lit  make  static  assumptions  (Mssible ;  very  little  trade 
in  "  normal  equilibrium  "  or  static  state;  volume  of  trade 
•lepends  on  transitions  and  dynamic  chanKes;  functional 
theory  of  money  and  credit  must  be  dynamic  theory; 
abstraction  from  money  by  static  theory;  no  static 
theory  of  money  and  cn-dit  possible;  quantity  theory 
misses  whole  point  of  money-functions 263-266 


APPENDIX  TO  CHAPTER  XIII 

THE  RELATION  OF  FOREIGN  TO  DOMESTIC  TRADE  IN  THE  UNITED  STATES 

Ambiguity  of  "domestic  trade":  figures  comparable  with 
export  and  unport  figures  cannot  include  turnovers;  net 
income  of  United  States,  minus  imports  on  retail  basis, 
counted  as  domestic  trade;  exports  on  retail  basis 
counted  as  foreign  trade;  net  income  for  igio;  index  of 
variation  for  other  years;  cautions  and  qualifications; 
ratio  of  foreign  to  domestic  trade,  1890-1916 267-278 


CHAPTER  XIV 


THE  VOLUME  OF  TRADE  AND  THE  VOLUME  OF  MONEY  AND  CREDIT 


Interdependence  of  trade,  and  money  (and  credit) ;  increasing 

trade  causes  increase  of  money  and  credit 279-281 

Quantity  theory  doctrine:  Fisher  vs.  Laughlin 281-282 

Quantity  theory  has  no  explanation  of  elastic  bank  credit: 

"Currency  Theory"  of  deposits 282-285 

Loans  and  deposits 285-288 

Bills  of  exchange 288-290 

S-  amary  of  quantity  theory  doctrine 390-291 


xxu 


ANALYTICAL    TABLE    OF    CONTENTS 


\  CHAPTER  XV 

'j      THE  QUANTITY  THEORY:   THE  "PASSIVENESS  OF  PRICES" 

PAGE 

Heart  of  quantity  theory:  price-level  cannot  change  without 
prior  change  in  money,  deposits,  trade,  or  velocities: 
independently  rising  price-level,  una  )le  to  alter  trade  or 
velocities,  would  drive  money  away,  and  so  be  unable  to 
sustain  itself;  individual  prices  can  rise  independently, 
but  other  prices  must  fall  to  compensate 292-295 

Criticism:  argument  impressive  only  because  it  assumes  an 
««C(iz«frf  rise  in  general  price-level;  when  causes  assigned, 
prices  can  independently  rise,  compelling  modification 
in  other  factors  in  "equation  of  exchange";  "transi- 
tional" and  "normal"  effects:  instances 295-299 

Quantity  theory  conllicts  with  supply  and  demand:  supply 
and  demand  holds  good:  p>articular  prices  and  price- 
level 299-300 

Generalization  of  conflict  to  include  cost  of  production, 

capitalization  theory,  imputation  theory 300 

Capitalization  theory  vs.  quantity  theory;  different  psycho- 
logical assumptions  of  the  two  theories 300-306 

Cost  of  production  vs.  quantity  theorj';  moncy-htcome  vs. 

quantity  of  money 306-308 

Quantity  theory  false,  granting  all  its  assumptions 308-310 

Doctrine  that  price-level  independent  of  particular  prices, 
and  presupposed  by  them,  false;  absolute  value  of  money, 
not  price-level,  presupposed;  price-level  may  change 
with  value  of  money  constant,  through  changes  in  abso- 
lute values  of  goods 310-314 

CH.»PTER  XVI 

THE   QUANTITY   THEORY  AM)   INTERNATIONAL  GOLD   MOVEMENTS 


Quantity  theory'  holds  that  goM  movements  depend  on 
price-levels;  but  price-level  mere  average,  cause  of  noth- 
i"S 31S-316 

Some  prices,  risii.g,  tend  to  repel  gold,  but  most  prices  have 

no  such  eflect 316-317 


ANALVnCAL   TABLE    OF   CONx-ENTS  xxiii 

PAGE 

Some  prices,  rising,  bring  in  gold 317-319 

Gold  movements  and  money-rates 319-320 

CHAPTER  XVII 

THE  QUANTITY  THEORY   VS.   GRESHAM's  LAW 321-323 


Sf 


if 


I , 


n 


CHAPTER  XVIII 

THE  QUANTITY  THEORY  AND  "WORLD   PRICES" 

Types  of  quantity  theory:  world's  volume  of  gold  vs.  quantity 
of  money  in  given  country;  standard  vs.  token  money; 
abandonment  of  dodo-bone  theory  and  "equation  of 
exchange" 324-326 

Credit  docs  not  rest  on  money:  measure  of  values  vs.  reserves; 

loans  and  wealth;  value  of  money  vs.  price-level 326-328 

Loose  relation  of  reserves  and  credit  in  world  as  whole;  no 
proportionality  of  quantity  of  gold  to  value  of  gold;  no 
quantity  theory  needed  to  assert  that  value  of  gold  re- 
lated to  its  quantity 328-330 

CHAPTER  XIX 

STATISTICAL  DEMONSTRATIONS   OF   THE   QUANTITY   THEORY— THE   RE- 
DISCOVERY  OF   A   BURIED   CITY 

Criticism  of  quantity  theory  statistics  yields  constructive 
conclusions;  Mitchell  and  Greenbacks;  Kemmerer's  and 
Fisher's  statistics  of  "equation  of  exchange";  Kem- 
merer's criticism  of  earlier  statistics 33I-33S 

Kemmerer's  and  Fisher's  figures  all  wrong  except  for  volume 
of  money  and  deposits,  and  prices  in  base  year;  if  cor- 
rect, would  not  prove  quantity  theory 335-337 

Fisher's  statistics,  resting  on  Kemmerer's,  chiefly  studied: 

their  relation  to  Kinley's  "deposits"  figures ,. .  ,   337-338 

M' V'  calculated :  errors  in  calculation ;  New  York  very  incom- 
plete in  Kinley's  figures;  private  banks  and  trust  com- 
panies; clearings  and  "deposits,"  in  New  York  and 
outside;  "total  transactions  "and  clearings;  Fisher  exag- 
gerates country  checks  by  at  least  116  billions,  for  lyog; 
major  part  of  all  "check  deposits "  in  New  York  City . . .     48-353 


if  t 


XXIV 


ANALYTICAL  TABLE  OF  CONTENTS 


I'.*  ' 

s 


PAGE 
New  ^  ork  as  "clearing  h  jusc"  for  United  States:  extent  of, 
ami  influence  of  on  New  York  clearings,  much  overesti- 
mated; bull:  of  .\cw  York  clearings  and  New  York 

"deposits"  grow  out  of  New  York  business 353-361 

Index  of  variation  for  M'V  wrongly  weighted;  V'  wrongly 

calculated  for  all  years;  which  upsets  calculation  of  V. .  .  361-363 
Volume  of  trade:  greatly  exaggerated  by  bank  transactions, 
which  include  vast  deal  of  duplications  in  checks,  loans 

and  repayments,  etc 363-368 

Fisher's  reply;  ;<;.'(/rrcounting  olTsets  oi'cnounting 368-369 

Main  items  of  undercounting  in  clearing  houses  of  specula- 
tive exchanges;  measurement  of,  in  New  York  Stock 
Exchange,  and  Chicago  Board  of  Trade;  swamped  by 

call  loan  transactions,  which  exceed  security  sales 36(;  381 

ri":e-indcxesof  Kemmererand  Fisher,  dominated  by  whole- 
sale prices,  have  no  relevance  to  their  "equations  of  ex- 

'^'""R'^" 381-383 

In  general,  their  figures  bury  speculation  and  New  York  City  383 


PART  III.    THE  V.iLUE  OF  MONEY 
CHAPTER  XX 

RECAPITULATION   OF  POSITUE  DOCTRINE 

Recapitulation  of  constructive  theses  of  Parts  I  and  II,  and 

program  of  Parts  III  am'  IV 387-396 


CHAPTER  XXI 

THE  ORIGIN  OF  MOyr:Y,  AND  THE  VALUE  OF  GOLD 

Problem  stated ^^^_^^^ 

\  alue  t'.v.  .stiltability:  degrees  of  siileability ;  theory  of  saleabil- 
ity ;  ••  buying  i)rice "  vs.  "selling  prite  " ;  indirect  exchange 
in  ixirter  economy;  development  of  commodity  of  supe- 
rior s:dcahi!ity  int-)  money 401-406 

Money  never  unique 406-407 


ANALYTICAL    TABLE    OF    CONTENTS  XXV 

PAGE 
Origin  of  gold  money:  ornament;  store  of  value;  social  pres- 
tige of  prodigality  and  of  ornament;  love  of  approbation, 
sex-impulse,  and  competitive  display;  elastic  value-curve 

of  gold;  industrial  employments  of  gold 407-413 

Distribution  of  wealth  and  power,  and  value  of  gold 413-416 

L 

CHAPTER  XXn 

THE  FirNCTIONS  OF  MONEY  AND  THE  VALUE  OF  MONEY 

Classification 41 7-418 

Measure  of  values  (standard  of  value)  distinguished  from 
medium  of  exchange;  former  does  not  add  value  to 

money  metal,  latter  does 418-424 

Reserve  function 424 

Money  as  "bearer  of  options";  distinguished  from  store  of 
value;  the  dynamic  function  of  money  par  excellence;  ex- 
planation of  low  rates  on  call  loans,  and  short  loans,  and 
low  yield  of  high  grade  bonds,  which  share  "bearer  of 
options"  'auction;  "pure  rate"  of  interest  vs.  "money 

rates":  Austria;  the  New  York  money  market 424-432 

Legal  tender;  the  Slaalliche  Theorie 432-436 

Standard  of  deferred  payments;  which  functions  add  to  value 

of  money  metal? ^^5 

Relation  of  money  rates  to  capital  value  of  money 436-442 

Agio  when  coinage  is  restricted:  India  vs.  Western  World 442-450 

Equilibrium  of  gold  in  arts  and  gold  as  money:  difficulties  of 

marginal  analysis;  the  money-market  phenomena 450-458 

CHAPTER  XXni 


CREDIT 

Analysis  rather  than  definition:  "futurity"  not  essence  of 
credit;  credit  part  of  general  value  system;  stocks  as 
(Tedit  instruments;  juridical  and  accounting  phases.  .  .  .  450-462 

Confidence;  involved  iii^'eiteral  value  phenomena  as  well  as 
credit;  social  psychology  of  confidence;  contagions;  in- 
fluence of  centers  of  prestige;  nothing  unique  in  credit; 
selling  vs.  borrowing 462-469 


XXVI  ANALYTICAL    TABLE    OF    CONTENTS 

PAGE 

Dcfiniiion  of  credit;  credit  vs.  credit  transaction;  credit  and 
exchange;  bulk  of  credit  grows  out  of  dynamic  condi- 
tions    469-474 

Functions  of  credit;  increasing  saleability  of  non-pecuniary 
wealth;  corporate  organization;  limits  of  credit  expan- 
sion    475-478 

Consideration  of  objections:  that  personal  loans  do  not  rest 
on  wealth;  public  loans;  that  value  behind  loan  would 
not  exist  if  loan  were  not  made 478-484 

Schumj:  >ter's  "heresies";  his  view  of  the  function  of  the 
banker:  "dynamic  credit";  America  vs.  Continental 
Europe 484-488 

Peculiarities  and  functions  of  bank  credit;  technique  of 
banking:  capital;  assets;  reserves;  "liquidity";  money 
market 488-496 


CHAPTER  XXi\ 

CREDIT — BAXK   ASSETS  AND  BANK   RESERVES 

Traditional  view  that  liquid  commercial  loans  normal  and 
dominant  type  of  bank  asset  disproved;  cannot  exceed 
iiK  per  cent  of  assets  of  American  banks;  analysis  of 
bank  assets:  "other  loans  and  discounts";  slock  col- 
lateral loans;  loans  on  "other  collateral  security"; 
stocks  and  bonds  held  by  banks;  classes  of  banks;  va- 
rious combinations;  excluding  real  estate  loans,  more 
than  half  of  credit  extended  by  State  and  national 
banks  and  trust  companies  is  to  stock  market;  rapid 
development  of  stock  collateral  loans:  New  York; 
Europe 498-512 

Activity  of  different  types  of  loans:  banking  assets  get 
liquidity  chiefly  from  stock  market,  and  from  produce 
speculators 512-51^ 

Credit  extended  to  Wall  Street  not  at  expense  of  ordinary 

commerce;  countr>'  banks  and  Wall  Street 516-518 

Federal  Reserve  Banks  should  rediscount  stock  collateral 
loans;  "Money  Trust "  a  trust  in  financing  corporations, 
not  ordinary  commerce;  panics  and  Federal  Reserve 
System 520 


ANALYTICAL  TABLE  OF  CONTENTS 


XXVll 


.  PACE 

Quantity  theory,  putting  all  cxchangv-s  on  a  par,  grotesque: 

volume  of  trade  and  prices  in  ihe  stock  market 520-523 

Direct  and  indirect  financing  of  corporations  by  banks; 

"margin  dealer"  as  "banker" '  523-526 

Adam  Smith's  view  of  banker's  functions,  and  of  safe  bank 

'°^"s 526 

Correct  on  basis  of  facts  of  his  day,  but  corporate  organiza- 
tion and  organized  stock  market  have  made  smelting 

house  as  liquid  as  consumers'  goods 527 

Division  of  labor  in  banking:  America  vs.  Germany 527-528 

Agriculture  in  money  market S?8-52q 

Reserve  problem:  special  case  of  problem  of  liquid  assets; 

many  flexible  substitutes  for  cash 529-532 

Causal  relation  runs  from  deposits  to  reserves;  gold  produc- 
tion and  reserve-ratio 532-53? 

No  static  law  or  "normal  ratio"  possible;  reserve  function 
entirely  dynamic  function ;  reserve  not  needed  in  "static 
state";  illustrated  by  London  money  market;  "ideal 
credit  economy" 536-544 

PART  IV.    THE  RECONCILIATION  OF  STATICS  AND  DY- 
NAMICS 


CHAPTER  XXV 

THE   RECONCILIATION'  OF  STATICS  AND  DYNAMICS 

Theory  of  money  as  focus  of  general  economic  theory,  ex- 
hibiting interdependence  of  doctrines;  basis  of  further 
unification  of  statics  and  dynamics  in  higher  synthesis . .  547-548 
Statics  vs.  dynamics,  normal  vs.  transitional,  and  related  con- 
trasts; illustrations;  divergent  lines  of  doctrine:  tariffs, 

wars,  overproduction,  extravagance,  etc 548-552 

Statics  quantitative;  dynamics  qualitative 552-553 

Statics  and  dynamics  both  abstract 553-554 

Dynamics  and  "friction " 554-555 

"Theory  of  prosperity"  and  dynamics 555-556 

Statics  and  cross-section  analysis;  statics  as  price-theory; 

dynamics  as  value-theory 556-560 


XXVllI 


ANALYTICAL      ABLE    OF   COXTENTS 


PAGE 
(k-ncralization  of  statics:  price-theory  applied  to  dynamic 
F)henomena:  capitalization;  costs;  "taxonomy;"  "'dis- 
countinj;'  dynamic  chanscs;  money  the  static  measur- 
ing-rod: wide  scope  of  money-measure;  measurement  of 

non-economic  values 560-569 

(Generalization  of  dynamics:  all  values,  whether  of  wheat  or 
"Rood  will,"  have  social  psychological  explanation; 
technological   and    biological   factors,   and    the  static 

equilibrium;  business  cycles 569-575 

business    man    vs.    economic    theorist,    and    value-theory; 

manipulation  of  values  and  prices 675-678 

Statics  and  time 578-580 

Immaterial  capital 580-582 

Statics  and  tlynamics  have  not  different  subject-matter 583-586 

Equilibrium  of  all  social  values:  statics  and  dynamics  of  the 

law:  social  forces  and  social  control 586-589 

Summary  of  Part  I\' 589-591 


PART  I.    THE  VALUE  OF  MONEY  AND  THE 
GENERAL  THEORY  OF  VALUE 


I!   I 


I 

It 


THE  VALUE  OF  MONEY 


CHAPTER  I 

ECONOMIC  VALUE 

The  problem  of  the  value  of  money  is  a  special  case  of 
the  general  problem  of  economic  value.    The  present  chap- 
ter IS  concerned  with  the  general  theory  of  value,  while  the 
rest  of  the  book  will  consider  the  numerous  peculiarities 
and  complications  which  make  money  a  special  case     The 
mam  proof  of  the  theory  here  presented  is  to  be  found  in  a 
previous  book »  by  the  present  writer.    A  number  of  period- 
ical articles  by  several  writers  which  have  since  appeared 
in  criticism  or  in  further  development  of  the  theory,  have 
at  vanous  points  led  to  shifting  emphasis  and  clearer  under- 
standing on  the  author's  part,  and  the  present  exposition 
without  seeking  explicitly  to  meet  many  of  these  criticisms' 
or  to  embody  the  new  developments,  will  none  the  less  be 
different  because  of  them.     To  one  writer  in  particular, 
Professor  C.  H.  Cooley,  the  theory  is  indebted  for  restate- 
ment, amplification,  and  important  additions.^     On  the 
whole,  however,  the  theoiy  presented  in  this  chapter  is  sub- 

'■Sodal  Value,  Houghton  Mifflin,  Boston,  ign. 

°?.W  ^;  "■.'  "^''''"ation  as  a  Social  Process,"  Psyck  Bull  Dec  t- 
1912;  The  Institutional  Character  of  Pecuniar^  VaElon  ' '  ^ «^'.V  ' ' 
Journal  of  SucioU    "    Tan    mrj-  "Th»  q^o,  r  n        .       '     ^'"«^"^<"« 

Ibid  Set/t  inA  "Th»  P  ^'  r  «  ^^''"^  °^  Pecuniaiy  Valuation." 
iota.,  sept.  igi3,  The  Progress  of  Pecuniary  Valuation  "  Quart  Jour  nf 
£««.,  Nov  rgi5.  Clark,  J.  M.,  "The  Concept  of  Value!"  S"\ZoS 
ccn^  o?  V  i  '""v    i  ^'"•'  '^"'^-  ^9'S.    Anderson.  B.  M..  Jr  ,  "The  Co^' 

Sll  Value  '^0«£r''        ;  T'-    IV^'  ^-  ^■'  "Economic  Value  and 

..u^ain^SoSro/^„j-s:,s^.  s-^T-S: 

3 


4 


rm;  \  \iii;  oi    money 


stantially  the  tht-ory  presented  in  the  earlier  book.  The 
theory  is  set  forth  in  the  present  chapter  with  sufficient 
fullness  to  make  the  present  volume  independent  of  the 
earlier  I)ook. 

Value  has  long  been  recognized  as  the  fundamental 
economic  concept.  There  have  been  many  and  divergent 
definitions  of  value,  and  many  different  theories  as  to  its 
origin.  It  is  the  belief  of  the  present  writer— not  shared 
by  all  his  critics.'  that  the  definition  of  value  which  fol- 
lows, and  the  conception  of  the  function  of  value  in  eco- 
nomic theory  involved  in  it,  conform  to  the  actual  use  of  the 
term  ii.  the  main  body  of  economic  literature.  The  theory 
of  the  causes  of  value  here  advanced  is  new,  but  the  defmi- 
tion  of  value,  and  the  conception  of  the  relation  of  value 
to  wealth,  to  price,  to  exchange,  and  to  other  economic 
ideas,  seem  to  the  present  writer  to  conform  to  what  is 
implied,  and  often  expressed,  in  the  general  usage  of  econ- 
omists.* 

.Soiiiil  ['oint  of  \icw  in  Kconomics.-  //;/</.,  Xov.  1Q13  and  Feb.  1914.  John- 
son \.  S.,  in  Anuruan  Ecoiwrnic  Kcvit-u;  June,  191  j,  pp.  320  d  seq.  Carver, 
I.  N.,  in  Jour,  of  Pol.  Ear,,.,  June,  1912.  .Me;i,l,  (i.  H.,  in  Psvch.  Bull., 
IX'C.  igu.  Klhv(xj<l,  C.A.,  in  .Uinrican  Jour,  of  .Sociologv,  1913.' Ansiaux, 
-M.,  in  Archhrs  Sonologlqiics,  Hullctin  de  I'lnsliliU  dc  ' Sociologie  Sohay 
.May  25,  191 2,  pp.  949-55.  ' 

Professor  Cook-y's  articles,  which  I  have  listed  first  in  this  note,  have  in 
certain  ini|K,rtant  partii  ulars  shifted  the  emphasis  and  chanRed  the  method 
of  approach.  He  is  more  interested  in  the  Rcneral  sociolof,Mcal  as[K'cts  of  the 
value  pn.Mem  than  in  the  technical  economic  asiH;cts.  In  considerins  eco- 
nomic value,  he  is  more  interested  in  its  general  social  functions  than  in  its 
function  as  a  tool  of  thou^lit  for  the  economic  theorist.  He  has,  therefore, 
l)een  less  hound  hy  scliemata  than  I  have  in  the  discussion.  This  different 
method  of  a|)proach,  coupled  with  a  sinRular  charm  in  cx|X)sition  which 
chara.:teri/.es  exerythin-  Professor  Cooley  writes,  makes  it  seem  probable 
to  me  that  readers  who  may  find  the  doctrine  as  I  set  it  forth  unconvincing, 
will  he  con\  inced  hy  Professor  Cooley 's  exposition.  I  ho|)e,  too,  that  Pro- 
fessor Cooley's  articles,  wliich  have  been  scattered  among  three  periodicals 
may  soon  appear  together  under  one  cover.  ' 

'  Including  many  whose  formal  definitions  are  quite  different,  and  who 
would  re|)udiate  the  contentions  here  advanced!  Cf.  my  article.  "The  Con- 
.ept  of  \alue  Furiher  Considered,"  Qitarlcrly  Journal  of  Economics,  Aug. 
1915,  and  .Soiial  Value,  chs.  2  and  11. 


ECONOMIC   VALl'E  j 

It  is  important  to  separate  sharply  two  questions:  one, 
the  theory  of  the  causes  of  value,  and  the  other,  the  defini- 
tion of  value,  or  the  question  of  the  formal  and  logical 
aspects  of  the  value  concept.  The  two  questions  cannot 
be  wholly  divorced,  but  clarity  is  promoted  by  considering 
them  separately.  We  shall  take  up  the  formal  and  logical 
aspects  of  the  matter  first. 

Value  is  the  common  quality  of  wealth.     Wealth  in 
most  of  its  aspects  is  highly  heterogeneous:  hay  and  milk, 
iron  and  corn-land,  cows  and  calico,  human  services  and 
gold  watches,  dollars  and  doughnuts,  pig-pens  and  pearls- 
all  these  things,  diverse  though  they  be  in  their  physical 
attributes,  have  one  quality  in  common:  Economic  Value.* 
By  virtue  of  this  common  or  generic  quality,  it  is  possible 
to  add  wealth  together  to  get  a  sum.  to  compare  items  of 
wealth  with  one  another,  to  see  which  is  greater,  to  get 
ratios  of  exchange  between  items  of  wealth,  to  speak  of 
one  item  of  wealth,  say  a  crop  of  wheat,  as  being  a  percent- 
age of  another,  say  the  land  which  produced  it,  etc.    This 
common  quality,  value,  is  also  a  quantity.    It  belongs  to 
that  class  of  qualities  which  can  be  greater  or  less,  can 
mount  or  descend  a  scale,  without  ceasing  to  be  the  same 
quality,— like  heat  or  weight  or  length.     Such  qualities 
are  quantities.    There  is  nothing  novel  in  the  statement 

•  Definitions  of  wealth  differ,  and  there  are  few  if  any  definitions  of  wealth 
broad  enough  to  make  it  true  that  only  items  of  wealth  have  value.  All 
wealth  has  value,  but  not  all  value  is  embodied  in  wealth.  Thus,  stocks 
and  bonds,  and  "good  will"  have  value.  Few  writers  would  classify  them 
as  wealth.  The  distinction  between  wealth  and  proi)erty  is  employed  by 
many  wnters  to  meet  the  difficulty  here  presented,  and  it  is  held  that  these 
intangibles  have  only  the  value  of  the  wealth  to  which  they  give  title.  In  a 
logical  schema,  on  the  assumption  of  a  fluid,  static  equilibrium,  this  may 
serve.  It  is  true  in  fact,  however,  that  many  of  these  intangibles  have  value 
apart  from  the  wealth  to  which  they  give  title.  But  these  are  complications 
which  I  reserve  for  a  later  part  of  this  cf  ,.ter,  for  the  chapter  on  "Statics 
and  Dynamics,"  and  (in  the  case  of  irredeemable  paper  money)  for  the 
ciianter  on  "  Dodo  Bones." 


THE    VALUK  OF   MONKY 


that  a  quality  is  also  a  quantity.  It  is  implied  in  fvcry 
<Iay  sjweth.  We  say  that  a  man  is  tall,  or  heavy,  or  that 
the  room  is  hot — qualitative  statements;  or  we  may  say 
exactly  how  tall,  or  how  heavy,  or  how  hot— qu.  .ititative 
statements.  The  distinction  between  qualitative  analysis 
and  quantitative  analysis  in  chemistry  implies  the  same 
idea.  Thus  we  may  speak  of  a  piece  of  wealth  as  having 
a  definite  quantity  of  value,  or  say  that  the  value  of  the 
piece  of  wealth  is  a  detinite  quantity.  We  may  then  work 
out  mathematical  relations  among  the  different  quantities 
of  value,  sums,  ratios,  i)crcentages,  etc. 

Ratios  of  E.xchange  are  ratios  between  two  quantities  of 
value,  the  values  of  the  units  of  the  two  kinds  of  wealth 
exchanged.'  A  good  many  economists,  particularly  in 
their  chapters  on  defmition,  have  defined  value  as  a  ratio 
of  exchange.  This  is  inaccurate.  The  ratio  of  exchange 
presupposes  two  values,  which  are  the  terms  of  the  ratio. 
The  ratio  is  not  between  milk  and  wheat  in  all  their  attri- 
butes. It  i.'  between  milk  and  wheat  with  respect  to  one 
particular  attribute.  Compare  them  on  the  basis  of  weight, 
or  cubic  contents,  a'"d  }  .  would  get  ratios  quite  different 
from  the  ratio  which  actually  is  the  ratio  of  exchange. 
The  ratio  is  between  their  values. 

Ratio  of  Exchange 


Milk 


Wheat 


Social  Mind 
In  the  diagram  above,  something  of  what  is  to  follow  is 

•  The  notion  of  ratio  of  exchange  as  a  ratio  between  values  is  strictly 
accurate  only  under  static  assumptions.   Goods,  in  actual  life,  are  not  always 


ECONOMIC   VAI.rK  7 

anticipate*!,  since  the  cause  of  value  is  indicated.  Wheat 
is  shortn  to  he  exerting  an  influence  on  milk,  and  milk 
exert',  an  inlluenre  on  wheat.  The  comparative  strength 
of  these  two  influences  determines  the  ratio  of  exchange 
between  them.  But  these  two  influences  are  not  ultimate. 
The  ratio  of  exchanije  is  a  relation,  a  reciprocal  relation.  It 
works  both  ways.  But  behind  this  relativity,  this  scheme 
of  relations  between  .alues,  there  lie  two  values  which  arc 
absolute.  These  values  rest  in  the  pull  exerted  on  wheat 
and  on  milk  by  the  human  factor  which  is  fundamental, 
which  in  our  diagram  we  have  called  the  "social  mind." 
Values  lie  behind  ratios  of  exchange,  and  causally  deter- 
mine them.  The  important  thing  for  present  purposes 
is  merely  to  note  that  value  is  prior  to  exchange  relations, 
that  it  is  an  absolute  quantity,  and  not,  as  many  economists 
have  put  it,  purely  relative.  The  ratio  of  exchange  is 
relative,  but  there  must  be  absolutes  behind  relations. 

A  price  is  merely  one  particular  kind  of  ratio  of  exchange, 
namely,  a  ratio  of  exchange  in  which  one  of  the  terms  is 
the  value  of  the  money  unit.*    In  modern  life,  prices  are 


cxchatiKid  strictly  in  accordance  with  their  values.  Cf.  my  article,  "The 
ConceiJt  o.  vaiiic  Further  Considered,"  Q.  J.  E.,  Aug.  iqi.S.  PP-  698-702. 
In  cases  where  prices,  or  exchange  relations,  are  not  in  accord  with  values, 
the  term  "ratio  of  exchange"  is  inapplicable,  since  there  are  no  quantities 
to  be  terms  of  the  ratio — except  the  pure  abstract  numliers  of  the  com- 
modities, each  measured  in  its  own  unit,  exchanged. 

'  In  chai)ter  17  of  Social  Value,  I  have  followed  the  German  usage  in 
broadening  the  term,  price,  to  cover  all  exchange  relations.  This  has  le<l 
to  misunderstanfling  on  the  part  of  some  readers,  and  it  has  seemed  l)est  to 
me  to  return  to  what  api)ears  to  be  the  more  familiar  usage.  It  is  purely  a 
question  of  convenience.  Practically,  ratios  of  exchange  which  are  not 
money-prices  rarely  come  in  for  discussion,  outside  the  preliminary  chapter 
on  definition!  Professor  Fetter,  in  his  article  on  the  "  Definition  of  Price," 
in  the  American  Economic  Rnirw,  Dec.  191;,  proposes  to  broaden  the  term 
price  in  the  manner  which  I  am  here  abandoning,  and  his  count  of  economists 
would  seem  to  leave  us;ige  about  equally  divided  between  the  broader  and 
narrower  uses  of  the  term.  It  dws  not  seem  to  me  to  Ijc  a  ix)int  worth 
arguing  alxjul,  however,  and  since  I  ?  .  practically  convinced  that  cause 
of  misunderstanding  will  be  removed  I ..  j.ing  price  to  mean  "money-price," 


8 


THE   VALUE   OF  MONEY 


ri  ■-, 


the  chief  form  of  ratio  of  exchange,  but  it  is  important 
for  some  purposes  to  remember  that  they  are  not  the  only 
form. 

Values  may  simultaneously  rise  and  fall.  There  may 
be  an  increase  or  decrease  in  the  sum  total  of  values.  Ratios 
of  exchange  cannot  all  rise  or  fall.  A  rise  in  the  ratio  of 
the  value  of  wheat  to  the  value  of  milk  means  a  fall  in 
the  ratio  of  the  value  of  milk  to  the  value  of  wheat.  Both 
may  have  fallen  in  absolute  value  but  both  cannot  simul- 
taneously rise  or  fall  with  reference  to  one  another.  This 
is  the  truism  regarding  ratios  of  exchange  which  many 
economists  have  inaccurately  applied  to  value  itself  in 
the  doctrine  that  there  cannot  be  a  simultaneous  rise  or 
fall  of  values.  There  can  be  a  simultaneous  rise  or  fall  of 
values,  but  not  a  simultaneous  rise  or  fall  of  ratios  of  ex- 
change. 

There  can  be  a  general  rise  or  fall  of  prices.  Goods  in 
general,  other  than  money,  may  rise  In  value,  whi'e  money 
remains  constant  in  value.  This  would  mean  a  rise  in 
prices.  Or,  money  may  fall  in  value  while  goods  in  general 
are  stationary  in  value.  This  would  also  mean  a  rise  in 
prices.  In  either  case,  more  money  would  be  given  for 
other  goods,  and  the  ratio  between  the  value  of  the  money 
unit  and  the  value  of  other  goods  would  have  altered 
adversely  to  money.  There  are  writers  to  whom  the  term, 
value  of  money,  means  merely  the  average  of  prices  (or 
the  reciprocal  of  the  average  of  prices).  For  them,  a  rise  in 
the  average  of  prices  is,  ipso  Jacto,  a  fall  in  the  value  of 
money.  This  view  will  receive  relocated  attention  in  later 
chapters.  The  view  maintained  in  the  present  book  is 
that  the  value  of  money  is  ;•  quality  of  money,  that  quality 
which  money  shares  with  other  forms  of  wealth,  which  lies 

I  shall  so  list-  the  term  in  this  book,  using  ratio  of  exchange,  or  exchange 
relation,  to  cxjire^b  the  broader  eontept. 


ECONOMIC  VALUE  9 

behind,  and  causally  explains,  the  exchange  relations  into 
which  money  enters.  Every  price  implies  two  values,  the 
value  of  the  money-unit  and  the  value  of  the  unit  of  the 
good  in  question. 

Value  is  prior  to  exchange.  Value  is  not  to  be  defined  as 
"power  in  exchange."  Certain  writers  '  who  see  the  need 
of  a  quantitative  value,  which  can  be  attributed  to  goods 
us  a  quality,  still  cling  to  the  notion  that  value  is  relative, 
that  two  goods  must  exist  before  one  value  can  exist,  and 
that  value  is  "power  in  exchange,"  or  "purchasing  power." 
The  power  is  conceived  of  as  something  more  than  the  fact 
of  exchange,  and  as  a  cause  of  the  exchange  relations,  but 
is,  none  the  less,  defined  in  terms  of  exchange.  This  posi- 
tion, however,  does  not  really  advance  the  analysis.  It  is 
a  verbal  solution  of  difficulties  merely.  To  say  that  goods 
command  a  price  because  they  have  power  in  exchange  is 
like  saying  that  opium  puts  men  to  sleep  because  it  has  a 
dormitive  power.  Physicians  now  recognize  that  this  is  no 
solution  of  difficulties,  that  it  is  merely  a  repetition  of  the 
problem  in  other  words.  If  we  wish  to  explain  exchange, 
we  must  seek  the  explanation  in  something  anterior  to 
exchange.  If  value  is  to  be  distinguished  from  ratio  of 
exchange  at  all,  it  cannot  be  defined  as  "power  in  ex- 
change." 

To  seek  to  confine  value  to  exchange  relations,  moreover, 
makes  it  impossible  to  speak  of  the  value  of  such  things 
as  the  Capitol  at  Washington  City,  or  the  value  of  an  en- 
tailed estate,  or  of  values  as  existing  between  exchanges. 
Nor  can  we  make  the  'price  which  a  good  would  command 
at  a  given  moment  the  test  of  its  value,  except  in  the  case 
of  the  highly  organized,  fluid  market.     Land,  at  forced 


'  E.  g.,  Bohm-Bawerk,  Griindztigc  der  Theorie  des  wirtschaftlichen  Ciiler- 
-wirli,  Conrad's  Jahrbiiihtr,  1886,  p.  478,  n.;  (akver,  "Concept  of  an  Eco- 
nomic Quantity,"  Qiutrlirly  Journal  of  KconoiPiic.s,  igo;. 


lO 


THE  VALUE  OF  MONEY 


sale,  notoriously  ottcn  brings  prices  which  do  not  correctly 
express  its  value.  Moieover,  even  for  wheat  in  the  grain 
pit,  the  exchange  test  is  valid  only  on  the  assumption 
that  a  comparatively  small  amount  is  to  be  sold.  If  very 
much  is  put  on  the  market,  the  situation  is  changed,  and 
the  value  falls.  In  other  words,  if  "bulls"  cease  to  be 
"bulls,"  and  shift  to  the  other  side  of  the  market,  the  very 
elements  which  were  sustaining  the  value  of  the  wheat 
have  been  weakened,  and  of  course  its  value  falls.  "Power 
in  exchange"  is  a  function  of  two  factors,  (i)  value  and  (2) 
saleability.  A  copper  cent  has  high  saleability,  with  little 
value,  while  land  has  high  value  with  little  saleabiUty. ' 
Some  things  have  value  with  no  saleability  at  all.  In  a 
socialistic  community,  where  all  lands,  houses,  tools,  ma- 
chines, etc.,  are  owned  by  the  state,  and  where  such " prices  " 
as  exist  are  authoritatively  prescribed,  value  and  exchange 
would  have  no  necessary  connection.  Values  would  remain, 
however,  guiding  the  economic  activity  of  the  socialistic 
community  directing  labor  now  here,  now  there,  determin- 
ing the  employment  of  lands  now  in  this  sort  of  production, 
now  in  that.  Exchange  is  only  one  of  the  manifestations 
of  value.  More  fundamental,  and  more  general,  including 
"power  in  exchange,"  but  not  exhausted  by  it,  is  the  power 
which  objects  of  value  have  over  the  economic  activities 
of  men.  This  is  the  fundamental  function  of  values.  The 
entailed  estate,  which  cannot  be  sold,  still  has  power  over 
the  actions  of  men.  The  care  which  is  taken  of  it,  the 
amount  of  insurance  which  an  insurance  company  will 
write  on  it,  etc.,  are  manifestations  and  measures  of  its 
value.  The  same  may  be  said  of  the  Capitol  at  Washing- 
ton.2 

'  This  distinction  is  elaborated  iufra,  in  the  chapter  on  the  "Origin  of 
Money." 

*  It  is  a  matter  of  high  imjKjrtunce  that  the  value  notion  should  be  ex- 
tended beyond  exchange,  if  the  economist  is  to  l)e  able  to  apply  his  theory 


ECONOMIC  VALUE 


zx 


i^' 


In  the  fluid  market,  prices  correctly  express  values. 
Assuming  that  the  money-uait  is  fixed  in  value,  variations 
in  prices  in  the  fluid  market  correctly  indicate  variations 
in  values.    The  great  bulk  of  our  economic  theory,  the 
laws  of  supply  and  demand,  cost  of  production,  the  capitali- 
zation theory,  etc.,  do  assume  the  fluid  market,  and  a  fixed 
value  of  the  dollar.*    Our  economic  theory  is  static  theory, 
in  general,  and  abstracts  from  the  time  factor  and  from 
"friction."    In  fact,  values  change  first,  and  then,  more 
or  less  rapidly,  and  more  or  less  completely,  prices  respond. 
In  the  active  wholesale  and  speculative  markets,  where 
the  overwhelming  bulk  of  exchanging  takes  place,   the 
prices  respond  quickly.     Static  theory  is  thus  adequate 
for  the  explanation  of  these  prices,  for  most  practical  pur- 
poses, so  long  as  the  changes  in  prices  are  due  to  changing 
values  of  goods,  rather  than  to  changing  value  of  the  money- 
unit.    Moreover,  the  distinction  between  value  and  price 
is,  in  a  fluid  market,  where  the  value  of  money  is  changing 
slowly,  often  not  important.    In  the  assumption  of  money, 
and  of  a  fixed  value  of  money,    he  absolute  value  concept 
is  already  assumed.     No  harm  is  done,  however,  if  the 
economist  does  not  explicitly  refer  to  this,  but  goes  on 
merely  talking  about  money-prices.    Very  many  economic 
problems  indeed  may  be  solved  that  way.    This  is  why 
the  inadequate  character  of  the  conceptions  of  value  as 
"ratio  of  exchange"  or  "purchasing  power"  has  not  pre- 
vented these  notions  from  being  serviceable  tools  in  the 
hands  of  many  writers.     But  there  are  many  problems  for 
which  these  conceptions  are  not  adequate,  because  the 
implicit  assumption  of  a  fixed  value  of  money  cannot  be 

to  such  highly  important  economic  problems  as  socialisn..  Cf.  Schaffle, 
Quintessence  of  Socialism,  and  Clark,  J.  M.,  Quart.  Jour,  of  Econ.,  Aug. 
iQiS,  p.  710. 

'As  shown,  infra,  in  the  chapters  on  "Suppiy  and  Demand,"  "Cost  of 
Production,"  "Capitalization  Theory,"  etc. 


12 


THE  VALUE  OF   MONEY 


1    ' 


made.  Among  these  problems  is  the  problem  of  th(  value 
of  money  itself,  which  const  cs  the  subject  of  this  book. 
For  that  problem,  an  absoh   .  value  concept  is  vital. 

If,  in  our  diagram  above,  we  substitute  for  "social  mind" 
the  more  general  expression,  "human  factor,"  we  should 
find  that  our  value  concept  is  the  common  property  of 
many  writers.  We  should  find  it  fitting  in  with  the  absolute 
value  notion  of  Adam  Smith  and  of  Ricardo.'  The  "hu- 
man factor"  which  explains  the  absolute  value  is,  for  them, 
labor.  We  should  find  it  fitting  in  with  the  "socially  neces- 
sary labor  time"  of  INIarx:  the  value  of  a  bushel  of  wheat 
is  the  amount  of  labor  time  which,  on  the  average,  is  re- 
quired to  produce  a  bushel  of  wheat.  It  is  an  absolute 
value.  It  is  a  causal  coefficient  with  the  absolute  value, 
similarly  explained,  of  the  bushel  of  corn,  in  explaining 
the  wheat-price  of  corn.  Our  concept  will  fit  in  exactly 
with  the  "social  use- value"  of  Carl  Knies,  according  to 
whom  the  economic  value  of  a  good  in  society  is  an  average 
of  its  varying  use-values  to  different  individuals  in  the 
market.  This  average  is  an  absolute  quantity.  The  abso- 
lute values  of  units  of  two  goods,  thus  explained,  causally 
fix  the  exchange  ratio  between  the  goods.  Knies'  value- 
theory,  it  may  be  noticed,  is  explicitly  modeled  on  that 
of  Marx,  to  whom  he  refers,  the  difference  being  that  Knies 
takes  an  average  of  individual  use-values,  while  Marx 
takes  an  average  of  individual  labor-times,  as  the  causal 
explanation.'-  Our  value  concept  will  fit  perfectly  with 
Professor  J.  B.  Clark's  "social  marginal  utility"  theory 
of  value.  Indeed,  the  present  writer  gratefully  acknowl- 
edges that  the  concept  is  Professor  Clark's  rather  than 
his  own,  and  that  all  that  is  necessary  for  its  explanation 

1  Vide  Social  Value,  p.  176,  n.  Cf.  Davenport,  Value  and  Distribution, 
chapter  on  ''Ricardo." 

2  Knies,  Das  Geld,  vol.  I  of  Celd  mid  Credit,  Berlin,  1873,  pp.  113-1^5. 
esp.  124. 


ECONOMIC  VALUE 


13 


has  been  set  forth  by  Professor  Clark.*  Professor  Clark's 
causal  theory  of  value,  his  explanation  of  this  absolute 
quantity  of  value  as  a  sum  of  individual  marginal  utilities, 
we  have  elsewhere  ^  criticised  as  involving  circular  reason- 
ing, like  all  marginal  utility  theories,  in  so  far  as  they  offer 
causal  explanations.  But  his  statement  of  the  logical 
character  of  value,  of  the  relation  of  value  to  wealth,  of 
value  to  price,  "  value  to  exchange,  of  the  functions  of  the 
value  concept  in  economic  theory,  and  of  the  functions 
of  value  in  economic  life,— Clark's  doctrines  on  these 
points  we  have  accepted  bodily,  and  in  so  far  as  the  present 
writer  has  added  anything  to  them  it  has  been  by  way  of 
elaboration  and  defence. 

The  concept  of  value  here  developed  is  explicitly  adopted 
by  T.  S.  Adams,  David  Kinley,  W.  A.  Scott,  W.  G.  L. 
Taylor,  L.  S.  Merriam,  and  A.  S.  Johnson,  among  American 
writers,  to  name  no  others.  All  of  these  writers  would 
concur  in  the  formal  and  logical  considerations '  as  to  the 
nature  of  value  here  presented,  whatever  differences  might 
appear  among  them  as  to  the  causal  explanation  of  value. 

The  value  concept  here  presented  performs  the  same 
logical  functions  as  the  "inner  objective  value"  of  Karl 

'  Chapter  on  "Value"  in  the  Philosophy  oj  Wealth,  and  ch.  24  of  the 
Distribution  of  Wealth. 

■  Social  Value,  ch.  7. 

'  T.  S.  Adams,  "Index  Numbers  and  the  Standard  of  Value,"  Jour,  of  Pol. 
Econ.,  vol.  X,  1901-02,  pp.  II  and  18-19;  Kinley,  "Money",  p.  62;  W.  G.  L. 
Taylor,  "Values,  Relative  and  Positive,"  Annals  of  the  Amer.  Acad.,  vol.  ix; 
Merriam,  L.  S.,  "The  Theory  of  Final  Utility  in  its  Relation  to  Money  and 
the  Standard  of  Deferred  Payments,"  Annals  of  the  American  Acad.,  vol.  iii., 
and  "Money  as  a  Measure  of  Value,"  Ibid.,  vol.  iv;  Scott,  W.  A.,  "Money 
and  Banking",  1903  ed.,  ch.  III.  Professor  Scott,  in  a  letter  to  the  writer, 
expresses  the  opinion  that  a  value  concept  which  makes  the  value  of  a  good 
a  quantity,  socially  valid,  reganllcss  of  the  particular  holder  of  the  coin  or 
commodity  in  question,  and  regardless  of  the  particular  exchange  ratio 
into  which  the  value  quantity  enters  as  a  term,  "  is  absolutely  essential  to 
the  working  out  of  economic  problems."  Johnson,  A.  S.,  "Davenport's 
Ixonomics  and  the  Present  Problems  of  Theory,"  Quarterly  Journal  of 
Economics,  May,  1914,  and  American  Econ.  Rev.,  June,  1912,  p.  320. 


14 


THE   VALUE  OF   MONEY 


Monger,  Ludwig  von  Miscs,  and  Karl  Helfferich,  discussed 
in  our  chapter  on  "Marginal  Utility,"  below,  and  is,  in  its 
formal  and  logical  aspects,  to  be  identified  with  that  no- 
tion. It  is  essentially  like  Wieser's  "public  economic 
value,"  discussed  in  the  same  chapter.*  That  there  should 
remain  critics  -  who  consider  the  present  writer  a  daring 
innovator,  who  is  thrusting  a  personal  idiosyncracy  in 
terminology  upon  economic  theory,  is  striking  evidence 
that  men  often  talk  about  books  which  they  have  not  read! 
The  reader  who  accepts,  provisionally,  the  doctrine  so 
far  presented,  as  a  tool  of  thought  which  will  aid  us  in  the 
further  progress  of  the  argument,  may  do  so  with  the  full 
assurance  that  he  is  accepting  a  tried  and  tested  concept, 
which  has  seemed  necessary  to  very  many  indeed  of  the 
great  masters  of  the  science.' 

So  far,  the  writer  feels  himself  in  accord  with  the  main 
current  of  economic  thought.  When  we  come  to  a  causal 
explanation  of  the  value  quantity,  however,  earlier  theories 
appear  unsatisfactory.  The  labor  theory  of  value  has 
long  since  broken  down,  and  has  been  generally  abandoned. 
The  reasons  for  this  will  appear  in  the  chapter  on  "Cost 
of  Production."  The  effort  to  explain  value  by  marginal 
utility,  by  the  satisfactions  which  individuals  derive  from 
the  last  increment  consumed  of  a  commodity,  has  likewise 

'  Cf.  also  Wieser's  Natural  Value,  p.  53,  n.  .Senior's  "  intrinsic  causes  of 
value  "  tomes  to  the  same  tiling. 

^  Cf.  Qtiarttrly  Journal  of  Economics,  .Vur.  1915,  pp.  681-82,  esp. 
681,  n. 

'  .'\mong  the  leading  figures  in  economics  to  whom  this  doctrine  is  un- 
acceptable, I  would  mention  es|)ccially  Professf>r  H.  J.  Davenport,  Value 
and  Dislribtilion  and  The  Economics  of  Enterprise.  A  writer  who  seeks 
to  minimize  the  importance  of  the  is<ue  between  the  relative  and  the  absolute 
conceptions  of  \'alue  is  Professor  J.  M.  Clark,  in  Quarterly  Journal  of  Eco- 
nomics, Aug.  1915.  Professor  Clark  seems  to  agree  with  much  of  what 
has  been  said  here,  and  the  present  writer  would  agree  with  Professor  Clark, 
as  indicated  (^^(vc,  that  for  many  purposes  we  do  not  need  to  look  behind 
prices— entering  a  caveat  that  this  is  true  only  so  long  as  we  can  assume  a 
fi.xed  absolute  value  of  money. 


ECONOMIC  VALLTE 


IS 


broken  down,  as  will  appear  in  the  chapter  on  "Marginal 
Utility."  In  general,  it  may  be  said  that  the  effort  to  pick 
out  feeling  magnitudes,'  either  of  pleasure  or  pain,  in  the 
minds  of  individuals,  and  combine  them  into  a  social  quan- 
tity, leads  to  circular  reasoning.  Thus,  the  utility  theory: 
It  is  not  alone  the  intensity  of  a  man's  marginal  desire  for 
a  good  which  determines  his  influence  on  the  market. 
If  he  has  no  money,  he  may  desire  a  thing  ever  so  intensely 
without  giving  it  value.  If  he  is  rich,  a  slight  desire  counts 
for  a  great  deal.  In  other  words,  utility,  backed  by  value, 
gives  a  commodity  value.  But  this  is  to  explain  value 
by  value,  which  is  circular.  So  with  the  theory  of  average 
labor  time.  How  shall  we  average  labor  time?  The  prob- 
lem is  easy  if  we  confine  ourselves,  say,  to  wheat.  If  one 
bushel  of  wheat  is  produced  with  ten  hours'  labor,  a  second 
with  eight  hours'  labor  and  a  third  with  six  hours'  labor, 
the  average  is  eight  hours,  and  we  may  fix  the  value  of  the 
bushel  of  wheat  according.  But  suppose  we  wish  to  com- 
pare the  labor  engaged  in  making  hats  with  the  labor  en- 
gaged in  raising  wheat.  How  can  such  labor  be  compared? 
Hats  are,  in  their  physical  aspects,  incommensurable  with 
wheat.  The  one  quality  which  they  have  in  common, 
relevant  to  the  present  interest,  is  value.  Given  the  value 
of  the  wheat  and  the  value  of  the  hats,  you  may  compare 
and  a\i:'*age  out  the  labor  engaged  in  producing  them. 
But  if  value  must  be  employed  as  a  means  of  averaging 
labor,  it  is  clear  that  average  labor  can  be  no  explanation 
of  value.  This  is  not  the  only  flaw  in  the  labor-time  theory, 
but  it  illustrates  a  vice  which  it  has  in  common  with  all 
those  theories  which  start  with  individual  elements,  and 
seek  to  combine  them  into  a  social  quantity.    The  whole 


'  The  psychulugy  of  this  statement,  which  involves  hedonism,  neetJs  im- 
provement, but  the  issue  need  not  be  discussed  here.  Cf.  Social  Value, 
ch.  lo 


i6 


THE   VALUE  OF  MONEY 


• 


method  of  approach  is  wrong.  It  makes  two  abstractions, 
neither  of  which  is  legitimate:  first,  it  abstracts  the  individ- 
ual from  his  vital  and  organic  connections  with  his  fellows, 
and  then,  second,  it  takes  from  the  individual,  thus  ab- 
stracted, only  a  small  part,  that  part  irimediutely  con- 
cerned with  the  consumption  or  production  of  wealth. 
In  this  process  of  abstraction,  very  much  of  the  explanation 
of  value  is  left  out.  The  whole  man,  in  his  social  relations, 
must  be  taken  into  account  before  we  can  get  an  adequate 
theory  of  value.  We  turn,  then,  to  a  brief  discussion  of 
society  and  the  individual,  and  to  a  discussion  of  those 
individual  activities  and  social  relations  which  are  most 
significant  in  the  explanation  of  economic  value. 

All  mental  processes  are  in  the  minds  of  individual  men. 
There  is  no  social  "oversoul"  which  transcends  individual 
minds,  and  there  is  no  social  "consciousness"  which  stands 
outside  of  and  above  the  consciousnesses  of  individuals. 
So  much  by  way  of  emphatic  concurrence  with  those  critics 
of  the  social  value  theory  '  who  persist  in  foisting  upon 
the  theory  the  notion  that  there  is  a  social  oversoul,  or 
that  the  "social  organism"  is  some  so  far  unclassified 
biological  specimen.  To  say  that  economic  value  is  a 
social  value,  the  product  of  many  minds  in  organic  inter- 
play, is  not  to  say  that  economic  value  is  independent  of 
processes  in  the  minds  of  individual  men,  or  that  it  results 
from  any  mysterious  behavior  of  a  social  oversoul. 

The  human  animal  is  born  with  certain  innate  instincts 
and  capacities.  Human  animals  of  difTerent  races  and 
different  strains  are  in  highly  important  points  different 
in  their  instincts  and  capacities.  But  the  human  animal 
is  not  born  with  a  human  mind.  Nor  could  the  human 
animal,  apart  from  association  with  his  fellows,  ever  de- 

'  As  Professor  R.  B.  Perry,  Quart.  Jour,  of  Ecoii.,  May,  1916. 


ECONOMIC  VALUE 


17 


velop  a  human  mind.  "The  human  mind  is  what  happens 
to  the  human  animal  in  a  social  situation."  '  Of  course, 
without  the  care  of  adults,  the  infant  would,  in  general, 
promptly  perish.  But,  more  fundamental  for  our  purposes, 
is  the  fact  that  all  the  important  stimuli  which  play  upon 
the  child  during  his  first  two  years,  when  the  human  mind 
is  being  developed,  are  social  stimuli.  So  true  is  this,  that 
the  child's  commerce  with  physical  things  runs  in  social 
terms.  The  child  interprets  the  physical  objects  about 
him  personally,  attributes  life  and  human  attributes  to 
them,  holds  conversation  with  them,  praises  and  blames 
them,  makes  companions  of  them.  This  animism  of  the 
child,  so  puzzling  to  an  old-fashioned  psychology,  is  readily 
explained  by  social  psychology.  It  is  a  social  interpreta- 
tion of  the  universe.  It  follows  naturally  from  the  prin- 
ciple of  apperception :  the  interpretation  of  the  unknown  in 
terms  of  the  known;  the  extension  of  accumulated  experi- 
ence to  the  interpretation  of  new  experiences.  The  first 
experiences  of  the  human  animal  are  social  experiences. 

In  the  history  of  human  society,  a  similar  generaliza- 
tion is  possible.  The  human  individual  is  found,  not  in 
primitive  life,  but  late  in  the  scale  of  social  evolution. 
Individuality  is  a  social  product  The  savage  is  not  a  free, 
self-conscious  person,  who  can  set  himself  off  against  the 
group,  and  feel  himself  an  isolated  centre  of  power.  His 
life  is  wrapped  up  in  the  group  life.  In  the  great  barbarian 
states  like  Ancient  Egypt  or  China,  the  life  of  the  individual 
was  so  controlled  by  social  tradition,  and  innovation  was 
so  ruthlessly  crushed  out  that  individuality  had  little 
scope.  Greece  and  Judea  gave  larger  scope  to  individual 
variation,  but  the  individual  still  felt  himself  bound  up 


'  In  this  I  am  following  a  line  of  IhouKlit  developed  by  Professtir  John 
Dewey  in  a  lecture  delivered  before  the  Harvard  Philosophical  Club  in 
1913-14. 


i8 


THE   VALUE  OF   MONEY 


with  his  group,  and  was  stoned,  given  hemlock,  or  cruci- 
fied if  he  rhallcnged  the  existing  social  order  too  seriously. 
The  break-up  of  the  Greek  city  states,  as  independent 
sovereignties,  and  their  subjection  to  the  universal  sway 
of  Rome,  made  it  possible  for  the  cultured  Greek  to  set 
himself  up  in  opposition  to  the  State;  the  coming  of  Chris- 
tianity, substituting  personal  relations  with  deity,  for  the 
communal  \.orship  which  had  preceded  it,  gave  the  indi- 
vidual a  vital  interest  apart  from  the  life  of  the  group  about 
him,  so  that  he  could  still  further  feel  independent  of  his 
immediate  social  environment.  The  development  by  the 
Roman  lawyers  of  the  Jus  Gentium,  the  law  which  is  com- 
mon to  all  nations  as  distinguished  from  the  particular 
law  of  a  given  group,  emphasized  the  doctrine  of  the  Chris- 
tian religion  and  of  the  Stoic  philosophy  of  a  humanity 
which  transcends  the  limits  of  a  given  state,* — a  notion 
which  tended  to  free  the  individual  from  dependence  on 
his  immediate  associates.  But  note  that  in  all  this  we  have 
merely  a  widening  and  multiplying  of  social  relationships, 
and  that  the  individual  gains  freedom  from  one  set  of 
social  relationships  only  by  coming  into  others.  The 
Christian  gains  freedom  from  his  immediate  surroundings 
because  he  feels  himself  in  communion  with  "angels  and 
archangels  and  all  the  glorious  company  of  Heaven." 
Francis  Bacon  could  survive  his  degradation  in  the  Eng- 
land of  his  day  because  he  could  leave  his  "name  and 
memory  ...  to  foreign  nations  and  to  the  next  age." 

Bagehot,  in  his  Physics  and  Politics,  Tarde,  and  Baldwin, 
to  name  no  others,^  have  shown  how  tremendously  re- 
sponsive human  beings  are  to  suggestion,  how  wide  is  the 

'  For  the  elaboraticin  of  these  ideas,  rf.  IIcRel,  Philosophy  of  History, 
passim;  WillouKhhy,  The  Suture  of  the  State,  passim;  Davidson,  T.,  History 
of  hUitualioii,  New  NOrk,  lyoo,  passim;  Uo^unquet,  B.,  Philosophical  Theory 
of  the  State;  Roycc,  J.,  The  World  and  the  Individual. 

^  Tardc,  Laus  of  Imitation;  Baldwin,  Social  and  Ethical  Interpretations. 


ECONOMIC  VALUE 


19 


sway  of  imitation  in  human  life,  how  fashion,  mode,  custom, 
etc.,  make  and  mold  the  individual.  Cooley,'  with  an 
improved  psychology,  has  amplified  the  analysis,  tracing 
the  develoi'  »ent  of  the  individual  mind  in  interaction 
with  the  minds  of  those  about  him,  makif  ;  still  clearer 
the  sweep  and  pervasiveness  of  social  factors  in  framing 
the  very  self  of  the  individual.  In  what  follows,  I  assume 
the  results  of  these  investigations.  They  constitute  the 
starting  point  from  which  we  set  out  on  the  quest  of  a  theory 
of  economic  value. 

So  much  for  the  mdividual.  He  is  a  social  product. 
But  what  of  society?  Objective,  external,  constraining 
and  impelling  forces,  which  are  not  physical,  which  are 
seemingly  not  the  products  of  the  will  of  other  individuals 
with  whom  the  individual  holds  converse,  meet  the  individ- 
ual on  every  hand.  There  is  the  Moral  Law,  sacred  and 
majestic,  which  stands  above  him,  demanding  the  sacrifice 
of  many  of  his  impulses  and  desires.  There  is  the  Law, 
external  to  him  and  to  his  fellows,  in  seeming,  failure  to 
obey  which  may  ruin  his  life.  There  is  Public  Opinion, 
which  presents  itself  to  him  as  an  opaque,  impersonal 
force,  before  which  he  must  bow,  and  which  he  feels  quite 
powerless  to  change.  There  are  Economic  Values  ruling 
in  the  market  place,  directing  industry  in  its  changing 
from  one  sort  of  production  to  another,  bringing  prosperity 
to  one  individual  and  bankruptcy  to  another,  not  with 
the  caprice  of  an  individual  will,  but  with  the  remorseless 
impersonality  of  wind  and  tide.  He  who  conforms  to  them, 
who  anticipates  their  mutations,  gains  great  wealth — 
but  no  business  man  dare  set  his  personal  values  against 
them.  There  are  great  Institutions,  Church  and  State 
and  Courts  and  Professions  and  giant  Corporations  and 
Political  Parties,  and  multitudinous  other  less  formal  or 

'  Human  Nature  and  the  Social  Order. 


30 


THE    VALUE   OF   MONEY 


smiillor  institutions,  which  ro  on  in  continuous  life,  though 
the  nu'n  who  act  within  them  puss  and  change.  Their 
Life  seems  an  imiependent  h'fe,  and  the  individual  who 
tries  to  change  their  course  fmds  that  his  elTorts  mean  little 
indeed,  as  a  rule.  There  is  a  realm  of  Social  Objectivity, 
a  realm  of  organization,  activity,  purpose  and  power,  not 
physical  in  character,  not  mechanical  in  nature,  wl.ich 
is  set  in  opposition  to  individual  will,  i)uriM)se,  power,  and 
activity.  How  is  the  individual  related  to  this  objective 
social  world? 

Three  main  tjpcs  of  theory  have  sought  to  answer  this 
question.  On  the  one  hand,  there  is  a  type  of  theory, 
doubtless  the  oldest  type,  a  type  which  arises  easily  in  a 
period  when  social  changes  are  slow,  which  .sees  in  the  ob- 
jective social  world  something  really  separate  and  distinct 
from  individual  life,  having  a  non-human  origin,  and  de- 
riving its  power  from  something  other  than  the  human 
will.  On  the  other  hand,  there  is  an  extreme  individualism, 
which  emphasizes  individual  separateness,  which  posits  as 
a  datum  the  individuality  which  we  have  seen  to  be  a  social 
product,  and  thinks  of  the  objective  social  realm  as  a  mere 
mechanical,  mathematical  summing  up  of  individual  fac- 
tors, or  as  a  something  which  individuals  have  consciously 
made,  by  contract  or  agreement,  or  what  not.  Finally, 
there  is  a  type  of  theory,  to  which  the  present  writer  would 
adhere,  which  finds  a  false  antithesis  ia  the  contrast  thus 
sharply  made  between  society  and  individual,  which  holds 
that  the  individual  is  not,  in  his  psychological  activity, 
so  much  set  off  from  the  activities  of  his  fellows  as  the 
contrast  would  indicate,  but  rather  shares  in  the  give  and 
take  of  a  larger  mental  life.  This  larger  mental  life  is  com- 
pletely accounted  for  when  all  the  individuals  are  com- 
pletely accounted  for,  bur  it  cannot  be  accounted  for  by 
considering  the  individuals  separately.     No  individual  is 


I 


ECONOMIC  VALUE 


31 


completely,  r  primarily,  accounted  for  until  his  relations 
to  the  rest  of  the  group  are  analyzed.  Thinkers  who  start 
out  with  the  individuals  separately  conceived,  and  then 
seek  to  combine  them  in  some  arithmetical  way,  abstract 
from  those  organic  social  relations  which  constitute  the 
very  heart  of  the  phenomenon  we  are  seeking  to  explain. 
The  parts  are  in  the  whole,  but  the  whole  is  not  the  sum 
of  the  parts.  The  relationships  are  not  arithmetical,  addi- 
tive, mechanical,  but  are  vital  and  organic.  Men's  minds 
function  together,  in  an  organic  unity.  ' 

The  first  two  of  these  types  of  theory  (perhaps  because 
individuals  are  physically  sharply  marked  off  from  one 
another,  and  go  on  in  biological  functioning  in  obvious 
separateness)  have  falsely  accentuated  the  self-dependence 
and  separateness  of  individual  minds.  The  second  type 
of  theory,  which  has  sought  to  work  out  the  whole  thing 
on  the  basis  of  this  false  conception  of  the  individual,  has 
largely  failed  to  see  the  objective  social  realities,  or  has, 
with  methodological  rigor,  denied  their  existence.  This 
second  type  of  thinking  has  especially  characterized  a  good 
deal  of  economic  theory,  which  rests  on  the  philosophy 
and  psychology  of  David  Hume."   We  will  set  our  doctrine 

'C/.  EUwood,  C.  H.,  Some  Prolenometia  to  Social  Psychology,  Chicago, 
1901,  and  Cooley,  C.  II.,  Social  Organization,  New  York,  1909.  See  also 
Social  Value,  ch.  9. 

'  Cf.  Social  Value,  ch.  8.  11.  J.  Davenport  is  the  best  modern  representa- 
tive t)f  this  extreme  individualism  in  economics.  Individualism  is  nearly 
dead  in  modern  political,  ethical,  and  sociological  theory.  Revivals  of  it 
ai)pear,  howev  er,  in  VV.  Kite,  Individualism,  and  in  a  recent  article  by  R.  B. 
Terry,  "Economic  Value  anfl  Moral  Value,'  Quart.  Journal  of  Economics, 
May,  1916.  (I  have  discussed  Professor  Fite's  views  in  the  Pol.  Set.  Quart. 
of  June,  It) 1 2.)  Professor  Perry  would  there  appear  to  reduce  ethical  value 
to  a  purely  individual  phenomenon.  But  he  really  brings  in  a  "categorical 
imjierative,"  not  derived  from  the  values  of  the  individual,  by  the  "back 
door."  "Now  our  general  moral  law  prescribes  that  an  agent  shall  take 
atcijunt  of  dVi  the  iiiitiesls  which  his  conduct  affects,  or  shall  judge  his 
conduct  by  its  consequences  all  round."  {Loc.  cit.,  p.  481.)  Just  how  this 
"general  moral  law"  is  to  be  derived  from  individual  values,  is  not  made 


22 


THE  VALUE  OP  HONEY 


i'  it 
i  i 


n 
u 


in  clearer  light  if  we  contrast  three  parallel  types  of  theory 
which  have  appeared  with  reference  to  the  nature  of  moral- 
ity, of  law,  and  of  economic  value.  For  each  of  these 
phenomena,  we  have  theories  which  represent  all  three  of 
the  t}pes  of  social  thinking  to  which  we  have  referred. 

In  the  theory  of  morals,  we  have,  at  one  extreme,  doc- 
trines like  those  of  Kant  and  Fichte,  according  to  whom 
morality  is  a  matter  of  obligation,  independent  of  the 
human  will,  independent  of  consequences,  inherent  in  the 
nature  of  things    Man's  mmd  can  find  out  what  the  moral 
law  is,  but  man's  mind  has  nothing  to  do  with  the  making 
of  the  moral  law.    The  same  notiori  is  involved  in  the  ideas 
of  "natural  rights,"  "justice  though  the  heavens  fall," 
and  the  like.    The  conception  is  strikingly  brought  out 
in  the  question  about  which  old  theologians  sometimes 
debated:  is  Right  right  because  God  enjoins  it,  or  does 
God  enjoin  Right  because  it  is  Right?    Whether  or  not 
Right  is  supreme  over  God,  these  old  theologians  never 
questioned  that  Right  is  supreme  over  all  human  wishes 
and  desires,  and  in  no  sense  an  outcome  of  them.    At  the 
other  extreme,  we  have  the  moral  doctrine  of  the  Sophists, 
for  whom  each  man's  will  was  right  for  him— a  doctrine 
which  reappears  in  every  individualistic  and  anarchistic 
age.    For  this  doctrine,  there  are  no  valid  social  standards 
of  right  and  wrong.    There  is  nothing  binding  on  the  moral 
agent  but  his  own  will.    In  between,  is  the  moral  doctrine 
of  such  thinkers  as  Friedrich  Paulsen,  or  John  Dewey, 
who  represent  the  reigning  type  of  moral  theory  to-day. 
For  them,  morality  is  a  purely  human  matter.    It  grows 
out  of  the  needs  and  interests  of  men.    What  is  good  at 
one  time  and  place  is  not  necessarily  good  at  another  time 

clear.  That  the  wants  of  every  man  should  count  equally  with  the  wants 
of  the  agent  is  a  principle  which  one  would  expect  from  Kant  or  Fichte,  but 
hardly  one  which  individualism  can  e-xpect  to  maintain. 


ECONOMIC  VALUE 


23 


and  place.  There  dre  no  immutable  moral  principles, 
valid  throughout  the  ages.  None  the  less,  morality  is  not  a 
private  matter,  about  which  men  may  do  as  they  please. 
Morality  is  the  product  of  an  organic  society,  the  product 
of  the  interplay  of  many  minds.  To  a  given  individual, 
the  moral  law  is,  indeed,  an  external  constraining  and 
impelling  force.  It  is  the  will  of  the  rest  of  the  group.  It 
may  be  his  own  will  too,  but  if  it  is  not,  it  overrides  his 
personal  preference.  He,  on  the  other  hand,  is  part  of  the 
group  which  constrains  and  guides  eve-y  other  individual. 
There  are,  in  fact,  many  sets  of  moral  values:  on  the  one 
hand,  the  social  moral  values  par  excellence,  which  the 
group  will  enforce  in  various  ways;  and  then,  for  each 
individual,  his  own  moral  values,  which  may  correspond 
qualitatively  more  or  less  with  the  group  values,  or  may 
antagonize  them.  But  the  Moral  Law  is  the  will  of  the 
group.  It  is  no  simple  composite  of  the  moral  values  of 
individuals.  It  has  its  organic  interrelations  with  all  phases 
of  social  life.  Economic  changes  modify  it,  legal  changes 
modify  it,  religious  values  modify  it,  all  phases  of  social 
life  are  expressed  in  it. 

In  legal  theory,  we  find  thes(  three  types  of  doctrine 
also.  The  first  type  is  clearly  indicated  in  the  general 
attitude  of  American  and  English  .ourts,  especially  toward 
the  common  law,  though  it  influences  their  interpretation 
of  all  law.  The  law  is  something  which  the  mind  of  man 
may  find  out,  but  may  not  make.  If  a  n*.  v  situation  arises, 
the  court  "finds"  the  law— in  theory  the  principle  "dis- 
covered" by  the  court  was  in  the  common  law  at  the  be- 
ginning. Of  course,  we  know  that  the  judge  invents  the 
rule  he  makes,  to  fit  a  novel  case,  but  the  judge  himself 
will  not  admit  it.  The  theory  of  the  law  and  the  theory  of 
morality  have  developed  in  close  connection,  and  the 
notion  of  "natural  right"  is  a  juristic  as  well  as  a  moral 


24 


THE  VALUE  OF   MONEV 


I!  ! 


If 

In 
11 


idea.    At  the  other  extreme,  we  have  from  certain  recent 
students  of  law  the  doctrine  that  "The  Law"  is  a  myth 
that  there  is  nothing  but  the  particular  opinion  of  a  par- 
ticular judge  at  a  particular  time.    Individualism  cannot 
go  so  far  in  legal  theory  as  to  give  every  individual  in  so- 
ciety a  chance  to  put  his  oar  in,  and  have  a  separate  law 
for  himself!    The  social  and  institutional  character  of  law 
IS  too  obvious  to  permit  that.    But  individualism  has  gone 
so  far  in  legal  theory  as  to  deny  all  objectivity  to  law  except 
in  a  given  decision  in  a  particular  case.    In  between  these 
two  extreme  views,  appear  the  views  of  writers  like  Savigny 
or  Professor  Munroe  Smith,  for  whom  the  law  is  a  chang- 
ing product  of  soJal  psychology,  volitional  »  rather  than 
intellectual  in  character,  objective  enough  to  the  individual 
who  violates  it,  or  the  judge  who  seeks  to  pervert  it,  but 
none  the  less  not  outside  the  minds  and  interests  of  men. 
In  Professor  Munroe  Smith's  phrase,  law  is  "that  part 
of  the  social  order  which  by  virtue  of  the  social  will  may 
be  supported  by  physical  force."  =    I  venture  to  describe 
this  type  of  legal  theory  as  the  "social  value"  theory  of 
the  law.    In  the  chapter  on  "The  ReconcUiation  of  Statics 
and  Dynamics,"  infra,  I  have  cited  certain  opinions  of 
Mr.  Justice  Holmes  which  apply  it,  and  even  bring  into 
it  the  notions  of  the  marginal  analysis. 

There  are,  similarly,  three  types  of  economic  theory. 
At  the  one  extreme  we  have  theories  of  "intrinsic"  value, 
which  would  place  economic  value  outside  the  wills  of 
men.  The  medijeval  discussions  of  "just  price"  often 
illustrate  this  notion.    It  creeps  not  infrequently  into  ju- 

■  I  use  "volition"  here  in  that  wide  sense  which  makes  it  cover  both  the 
niotor  an,I  the  affe.  t.ve  phases  of  mind.  Munroe  Smith  would  emphasize 
thi  m<.t<.r  as|K;ct.  where  SaviKny  stresses  feeling  and  sentiment. 

r^Kir'^'p  r"''"  '' i'"'"';':  V''''"^  '''■f"''=  ^^^  ^'''^"'ty  "f  Columbia 
Lm\era.ty,  fcb.  ,903,  New  \urk,  The  Columbia  University  Press,  1909 


ECONOMIC  VALUE 


25 


dicial  opinions,— to  which  such  notions  are  essentially 
congenial!  The  working  economist  of  our  own  day  has 
found  little  use  for  it,  but  in  periods  when  economic  change 
was  slow  it  suggested  itself  not  unnaturally  to  men,  'as  an 
explanation  of  the  seeming  impersonality  of  market  phe- 
nomena, and  as  a  practical  idea  for  combatUng  extortion 
and  injustice.  Something  of  the  idea  is  involved  in  a  sen- 
tence of  Shakspere's: ' 

"But  value  dwells  not  in  particular  will; 
It  holds  his  estimate  and  dignity 
As  well  wherein  'tis  precious  vi  itself 
As  in  the  prizer." 

At  the  opposite  extreme  would  be  those  economists,  as 
Professor  Davenport  and  Jevons,  who  find  no  value  for 
a  good  except  in  the  minds  of  individual  men,  so  that  there 
may  be  as  many  different  values  as  there  are  different  men. 
That  something  social  and  objective  exists  in  the  market 
place  can  hardly  be  denied,  but  when  pressed  for  an  ac- 
count of  it,  these  writers  reduce  it  to  a  bare,  abstract, 
mathematical  ratio.  ^    Each  individual  mind  is  shut  up 
within  its  own  limits,  inscrutable  to  other  minds,  and  there 
can  be  no  psychological  phenomena  which  include  activities 
in  many  minds,  for  this  view.    In  between  these  two  ex- 
tremes, is  the  social  value  theory  of  the  present  writer. 
Economic  value  is  not  intrinsic  in  goods,  independent  of 
the  minds  of  men.    But  it  is  a  fact  which  is  in  large  degree 
independent  of  the  mind  of  any  given  man.    To  a  given 
individual  in  the  market,  the  economic  value  of  a  good 

'  I  ran  acroM  this  in  Wagner's  Grundlegung.  Wagner  had  found  it  in  Rau ! 
It  IS  from  Trtnlits  and  Cressida,  Act  II,  Scene  II 

'Davenport  Value  and  Distribution,  pp.  184.  n.,  and  330-31.  n.;  Jevons, 
ihiory  ofPohltcal  Economy,  pp.  ,4,  78-84,  esp.  63.  Cf.  Social  Value,  ch.  4. 
Ihis  seems  to  be  the  position  of  Professor  R.  B.  Perry,  also,  though  he  is 
not  so  e.\treme  as  Davenport.    Loc.  cit. 


26 


THE  VALUE   OF  MONEY 


is  a  fact  as  external  as  objective,  as  opaque  and  stubborn, 
as  is  the  weight  of  the  object,  or  the  hiw  against  murder. 
There  are  individual  values,  marginal  utilities,  of  goods 
which  may  dilTer  in  magnitude  and  in  quahty  from  man 
to  man,  but  there  is,  over  and  above  these,  influenced  by 
them  in  part,  influencing  them  much  more  than  they  in- 
fluence it,  a  social  value  for  each  commodity,  a  product 
of  a  complex  social  psychology,  which  includes  the  individ- 
ual values,  but  includes  very  much  more  as  well.  Our 
theory  puts  law,  moral  values,  and  economic  values  in  the 
same  general  class,  species  of  the  genus,  social  value,  alike 
in  their  psychological  "stufT"  and  character,  to  be  explained 
by  the  same  general  principles,  even  though  difTerentiated 
in  their  functions,  and  in  the  extent  to  which  they  depend 
on  various  factors  in  the  social  situation.  They  are  parts 
of  a  social  system  of  motivation  and  control.  They  are 
the  social  forces,  which  govern,  in  a  social  scheme,  the 
actions  of  men. 

It  may  be  well  to  suggest  rough  diferenticB  which  mark 
off  these  values  from  one  another.  Legal  values  are  social 
values  which  will  be  enforced,  if  need  be,  by  the  organized 
physical  force  of  the  group,  through  the  government. 
Moral  values  are  social  values  which  the  group  enforces 
by  approbation  and  disapprobation,  by  cold  shoulders 
and  ostracism  or  by  honor  and  praise.  Economic  values 
are  values  which  the  group  enforces  under  a  system  of 
free  enterprise,  by  means  of  profits  and  losses,  by  riches  or 
bankruptcy.  The  group  may,  under  a  communistic  or 
socialistic  system,  rely  in  whole  or  in  part  upon  the  ma- 
chinery of  the  law;  in  which  case  economic  values  ap- 
pear not  in  their  own  form  as  immediately  guiding 
production,  but  as  'presuppositions"  of  some  of  the  legal 
values. 

The  differentiation  of  these  types  of  social  value  may 


ECONOMIC  VALUE 


»7 


also  run  in  terms  of  their  functions,^  though  it  is  not  so 
easy  to  mark  them  off  here,  since  their  functions  overlap. 
The  function  of  economic  values  is  to  guide  and  control 
the  economic  activities  of  men,  to  send  labor  from  one 
industry  to  another,  to  cause  one  sort  of  thing  to  be  pro- 
duced or  another,  to  supply  the  motive  force  which  impels 
industry.     Legal  and  moral  values  also  directly  affect 
industry,  often  working  to  check  the  results  which  the 
economic  values  alone  would  lead  to — as  when  the  law 
forbids  the  production  and  sale  of  liquor,  or  checks  child 
labor,  etc.   The  law,  on  the  other  hand,  does  not,  primarily, 
in  its  influence  on  industry,  seek  positively  to  determine  its 
direction.    The  law  forbids  the  production  of  liquor,  but 
does  not  decree  the  production  of  bread.    The  law  may 
seek  to  affect  industry  positively,  by  protective  tariffs,  for 
example,  which  aim  at  the  building  up  of  certain  indus- 
tries, but  its  effects  are  here  indirect,  reached  through 
modifications  in  the  economic  values.    Economic  values, 
on  the  other  hand,  do  not  primarily  aim  at  the  regulation 
of  the  conduct  of  men  outside  the  market  place,  or  the 
shop  or  the  farm,  etc.    Economic  values  are  not  primarily 
concerned  with  making  men  be  good  husbands  or  good 
neighbors,  or  brave  soldiers.     Economic  values  may  be 
used,  in  part,  for  these  purposes,  as  when  a  father-in-law 
uses  his  wealth  as  a  lever  to  make  his  son-in-law  behave— 
or,  indeed,  as  a  bait  to  get  a  son-in-law!    It  is  hard  to  find 
a  phase  of  social  life  which  is  not  touched  by  all  types  of 
social  values,  but  it  is  possible,  roughly,  to  mark  off  those 
phases  of  social  life  which  are  subject  to  primary  regula- 
tion by  one  or  the  other  sort  of  social  value. 

The  differentiation  is  easier  when  we  look  at  the  social 
institutions  which  have  to  do  primarily  with  the  one  or  the 

'This  term  carries  no  connotation  of  teleology,  as  here  used.    I  am  merely 
trying  to  sUte  what  the  different  kinds  of  value  do,  as  a  matter  of  fact. 


28 


THE  VALUE  OF  MONEY 


HI 


Other  sort  of  value.  Courts  and  legislatures  are  easily 
marked  off  from  stock  exchanges  and  banking  houses. 
There  is  not  so  clearly  an  institutional  nucleus  for  moral 
values,  since  the  church  has  lost  its  control  over  the  moral 
situation. 

When  we  view  the  matter  from  the  standpoint  of  the 
objects  of  value,  dijjcrentim  also  appear.  The  main  type 
of  object  of  moral  value  is  modes  of  conduct;  the  "type 
object"  of  economic  value  is  physical  things  which  men 
eat,  wear,  drink,  etc.,  even  though  quantitatively  the  major 
part  of  the  sum  total  of  economic  values  attach  to  other 
things,  instrumental  goods,  lands,  labor,  and  social  rela- 
tions, like  franchise  rights,  good  will,  which  in  the  main 
reflect  the  values  of  consumers'  goods;  '  objects  of  legal 
value  are  in  large  degree  the  same  as  objects  of  moral  value, 
namely,  modes  of  conduct,  but  moral  values  attach  to  a 
wider  group  of  objects,  and  legal  values  attach  to  certain 
forms  of  conduct  which  are  morally  indifferent. 

It  is  not  so  easy  to  make  the  differentiation  when  we 
view  the  thing  from  the  standpoint  of  the  consciousness 
of  men  who  are  at  the  centre  of  the  situation,  to  whose 
consciousness  the  social  values  are  presented.  We  may 
put  at  the  very  forefront  of  the  economic  value  of  oranges 
the  gustatory  feelings  or  desires  of  those  who  consume 
them;  at  the  forefront  of  the  moral  value  of  a  heroic  rescue 
by  a  fireman  the  thrill  that  runs  through  the  onlookers. 
Qualitatively,  these  psychological  states  are  different,  as 
those  who  have  experienced  both  will  know.  But  it  is 
difficult  indeed  to  put  the  difference  into  words.  When 
it  comes  to  a  legal  value,  say  the  legal  value  of  a  given  con- 
tract right  which  a  man  seeks  to  enforce  in  court,  it  is  not 

'  The  extent  to  which  the  values  of  consumption  ^oods  and  senices  are 
reflected  in  other  economic  values  will  receive  attention  below,  in  the  present 
chapter. 


ECONOMIC  VALUE 


39 


easy  to  find  any  particular  emotion  or  state  of  consciousness 
which  is  peculiar  or  appropriate  to  it.  The  value  is  so 
highly  institutionalized  and  impersonal,  that  it  seems  to 
the  court  and  lawyers  and  even  the  litigants  to  be  merely  a 
question  of  fact  to  be  intellectually  analyzed.  Its  roots 
are  deep  in  human  emotions,  but  not  in  the  emotions, 
primarily,  of  those  who  are  handling  the  transaction.  Per- 
haps the  jurist  has  states  of  consciousness  we  know  not  of. 
There  may  be  a  distinctively  legal  emotion.  It  seems  to 
crop  out  at  times  when  one  questions,  in  conversation  with 
a  judge  or  lawyer,  the  infallibility  of  the  courts.  But  the 
law  does  not  derive  its  power  therefrom!  Rather,  the  law 
derives  its  power  from  the  general  consent  and  acquiescence 
and  support  of  the  mass  of  men,  who  turn  over  to  experts 
the  details  of  administering  it,  and  who  support  The  Law 
in  general,  rather  than  the  rule  of  the  corpus  delicti,  with 
their  emotional  sanction. 

I  think  that  we  have  here  a  clue  to  a  vital  point  for  our 
theory.  We  need  not  expect  to  find  the  major  part  of  the 
explanation  of  any  of  these  social  values  in  the  conscious 
emotions  of  those  who  are  moved  by  them.  In  the  case 
of  the  orange  or  the  heroic  act,  we  are,  indeed,  close  to 
pretty  simple  human  feelings  and  desires.  In  general,  in 
the  case  of  moral  values,  the  individual  emotion  and  the 
social  value  are  qualitatively  comparable,  since  moral  values 
rarely  take  on  a  highly  institutional  character.  They  are 
more  free  from  class  or  institutional  control  than  other 
social  values.  This  need  not  be  true.  Thus,  the  planta- 
tion negro  need  not  feel  any  personal  shame  in  the  moral 
delinquency  which  he  none  the  less  hides  from  the  "white 
folks"  whose  values  he  must  more  or  less  conform  to. 
But,  on  the  whole,  moral  values  are  much  more  ''participa- 
tion values,"  *  shared  by  the  whole  group  in  common, 
'C/.  Social  Value,  p.  125,  and  Urban,  Valuation,  passim.    Urban's  idea 


3° 


THE  VALUE  OF  MONEY 


.' 


'i 


than  are  economic  values  or  legal  values.  When  we  pass 
beyond  the  simple  case  of  a  consumption  good,  and  get 
into  the  realm  of  the  more  institutional  economic  values, 
we  lose  all  guidance  from  the  clue  of  satisfactions  in  con- 
sumption. Just  what  emotion,  for  example,  is  appropriate 
in  the  presence  of  the  four  and  a  half  per  cent  convertible 
bond  of  the  Chesapeake  and  Ohio  Railway  Co.?  If  it  be 
answered  that  ultimately  that  bond  represents  satisfac- 
tions in  consumption,  since  the  owner  of  it  may  spend 
the  income  for  consumers'  goods,  or  since  the  railroad  in 
question  carries  coal  which  goes  to  Italy  to  be  used  in  a 
cruiser  which  will  sink  an  Austrian  warship,  thereby  giving 
consumers'  satisfactions  to  individuals  in  Italy,  so  that 
the  value  of  the  bond  is  ultimately  reducible  to  specific 
satisfactions  of  given  individuals,  we  may  still  hold  that 
those  satisfactions  do  not  constitute  the  value  of  the  bond, 
as  such.  Moreover,  the  same  is  true  of  the  legal  values. 
Ultimately,  very  specific  human  emotions  are  affected  by 
the  rule  of  the  corpus  delicti,  or  the  rule  governing  pleas  in 
estoppel.  Both  in  legal  and  in  economic  values  we  have  an 
elaborate  and  complex  system  of  social  psychological  char- 
acter, which  can  by  no  means  be  reduced  to  elementary 
desires  or  feelings  of  individuals,  even  though  when  the 
whole  story  is  told,  no  part  of  the  system  will  be 
found  outside  the  minds  of  individual  men.  The  point 
has  been  well  put  by  Professor  C.  H.  Cooley:  "It  would 
be  as  reasonable  to  attempt  to  explain  the  theology  of 
St.  Thomas  Aquinas,  or  the  Institutes  of  Calvin,  by  the 
immediate  working  of  religious  instinct  as  to  explain  the 
market  values  of  the  present  time  by  the  immediate  work- 

of  "participation  values"  is  Jietter  expressed  by  Cooley's  phrase,  "iiuman 
nature  values,"  while  Cooley's  excellent  phrase,  "institutional  values" 
characterizes  the  more  complex  values  in  which  classes  and  institutions 
are  specially  weighled.  Cf.  Cooley's  articles  referred  to  above,  and  Social 
Value,  chs.  11-15,  inclusive. 


ECONOMIC  VALUE 


31 


ing  of  natural  wants."  *  I  think  that  any  attempt  to  dif- 
ferentiate the  various  kinds  of  social  value  on  the  basis  of 
the  type  of  emotion  in  the  minds  of  those  who  have  most 
immediately  to  do  with  them,  or  to  explain  them  primarily 
by  those  emotions,  is  foredoomed.  The  law  does  not  get 
its  power  from  the  emotion  of  the  judge  who  gives  a  de- 
cision, nor  does  the  value  of  a  rare  painting  rest  chiefly  in 
the  intensity  of  desire  of  the  few  rich  cormoisseurs  who 
compete  for  it.  Back  of  the  judge,  giving  validity  to  his 
decision,  stands  the  will  of  the  group;  back  of  the  rich 
connoisseurs  stand  the  legal  and  other  social  values  con- 
cerned with  the  distribution  of  wealth,  by  virtue  of  which 
they  are  able  to  make  their  wants  felt  in  the  market.  Both 
judge  and  connoisseur  are  focal  points,  through  which 
stream  the  social  forces  affecting  the  values  in  question. 
Both  are  important.  But  the  emotions  and  ideas  of  neither 
exhaust  the  psychological  causation  involved  in  the  values. 
This  is  very  much  more  apparent  when  we  consider  the 
values  that  arise  in  the  great  speculative  markets,  say  in 
the  wheat  pit,  or  the  stock  exchange.  Those  who  buy  and 
sell  are  primarily  interpreters,  students,  of  impersonal, 
social  forces,  seeking  to  adjust  themselves  to  them,  to  fore- 
cast them,  in  such  a  way  as  to  derive  profit  from  them. 
Their  choices  and  decisions  are  also  factors.  Indeed,  it  is 
possible  to  view  the  matter  in  such  a  way  as  to  make  their 
decisions  the  whole  story.  In  the  same  way,  it  is  possible 
to  make  the  mind  of  the  judge  the  final  explanation  of  the 
legal  value.  But  the  speculators  themselves  are  under  no 
such  illusion.  They  know  very  well  that  if  they  run  counter 
to  the  facts  they  will  lose  money.  And  the  judge  knows  very 
well  that  the  range  of  arbitrary  choice  which  he  can  exercise 
without  impeachment,  or  at  least  without  reversal  by  a 

•  "The  Institutional  Character  of  Pecuniary  Valuation,"  American  Jour- 
nal of  Sociology,  Jan.  1913,  p.  546. 


32 


THE  VAT.T'K  OF  MONEY 


U 


higher  court,  is  very  limited.  Nor  is  even  a  Supreme  Court 
of  the  United  States  free  to  do  its  arbitrary  will.  Just  be- 
cause it  is  so  conspicuous,  and  because  its  doings  are  so 
important,  it  has  manifested  more  respect  for  judicial 
tradition,  and  more  responsiveness  to  the  tides  of  public 
sentiment,  than  any  other  court  in  the  Federal  Judiciary.' 
The  head  of  a  great  banking  house  makes  a  decision  re- 
garding an  underwriting  operation.  On  his  decision  de- 
pends the  question  of  whether  or  not  the  securities  are 
issued.  On  the  issue  of  the  new  securities  depends,  in  part, 
thf  values  of  the  existing  securities  of  the  corporation  in 
question,  and  the  nature  of  the  future  employment  of 
thousands  of  men  and  great  quantities  of  land  and  capital. 
Tremendous  power  is  concentrated  in  the  hands  of  this 
banker.  But  it  is  not  his  power !  He  cannot  exercise  it  in  an 
arbitrary  or  capricious  way.  He  approaches  his  problem 
in  much  the  same  spirit  that  the  judge  approaches  a  dis- 
puted question  of  law.  He  analyzes  the  factors  involved. 
He  considers  the  condition  of  the  money-market,  the  ques- 
tion of  the  probable  ease  or  difficulty  of  marketing  the  new 
securities  to  investors,  the  prospects  of  the  business  of  the 
corporation  in  question,  the  probable  future  demand  for 
its  products,  the  stability  of  that  demand,  the  personnel  of 
the  management  of  the  corporation,  the  attitude  of  the 
government  toward  it,  the  nature  of  its  other  outstanding 
securities,  with  special  reference  to  the  proportion  of  bonds 
to  stocks,  and  the  amount  of  "fixed  charges"  against  its 
earnings.  He  may  also  take  into  account  other  enterprises 
of  similar  character  which  he  has  connections  with,  and  the 
question  of  whether  or  not  building  up  the  corporation  in 
question  may  injure  other  corporations  to  which  he  has 
responsibilities.     He  looks    ar  into  the  future,  seeking  to 

'  This,  unfortunately,  is  not  high  praise,  as  the  Federal  Judiciary  in 
general  sets  a  lamentably  low  standard  in  these  matters. 


ECONOMIC   VALUE 


ii 


conserve  his  prestige,  and  unwilling  to  assume  responsibility 
for  an  issue  which  investors  will  later  lose  faith  in.  Prox- 
imately, his  decision  is  tremendously  important,  and  his 
thoughts  and  feelings  are  of  immense  significance,  but 
ultimately,  ihey  are  determined  by  all  manner  of  social  con- 
siderations, and  always,  tltc  degree  to  which  they  count  in 
determining  values  depends  on  his  weight  in  the  economic 
situation,  which  rests  (i)  on  his  prestige,  i.  e.,  the  massing  of 
beliefs  and  hopes  of  many  men,  (2)  on  his  wealth,  which 
rests  in  the  legal  and  moral  values  governing  distribution, 
and  (3)  on  his  institutional  relationships,  which  again  are 
psychological  facts,  partly  legal  in  character.  He  is  as 
much  a  social  instrument  as  is  the  judge.  Both  may  abuse 
their  power.  Both  do  at  times  abuse  their  power.  But 
the  significant  point  is  that  the  power  both  have  is  social 
power,  and  is  in  no  sense  proportional  to  the  intensity  of 
their  own  emotions.  It  arises  from  the  emotional  power  in 
the  minds  of  many  men. 

It  would  be  easy  to  elaborate  the  points  in  which  morals, 
laws,  and  economic  values  are  alike,  and  to  show  in  detail 
that  the  theory  of  economic  value  is  merely  a  special  case 
of  the  general  theory  of  social  value.  For  our  present  pur- 
poses, however,  it  is  enough  to  have  illustrated  the  general 
doctrine,  and  to  have  set  up  the  economic  values  as  true 
social  forces.  It  may  be  noticed  that  the  effort  to  dif- 
ferentiate the  different  kinds  of  value  is  not  altogether 
successful.  They  are  not  in  watertight  compartments  in 
social  life.  It  is  a  commonplace  among  students  of  ethics 
(.hat  moral  values  grow,  in  greater  or  less  ;iegree,  out  of 
economic  factors.  Indeed,  the  "economic  interpretation  of 
history"  has  as  its  central  theme  the  doctrine  that  morality, 
la.v,  and  ideal  values  in  general  arc  governed  by  the  eco- 
nomic situation.  This  is  a  one-sided  view.  Moral  and 
legal  values  are  influenced  and  modified  by  economic  forces. 


\  i 


\ 


I 
i 


34 


TlfF,   V  ALUI'    OV   M()XE\ 


Legal  and  moral  values  do.  in  part.  'Icrivc  their  power  from 
cconomii  \alues.  But  on  th*'  other  hand,  economic  valucn 
likewise  derive  part  of  their  power  from  lenal  and  moral 
values.  The  'social  mind"  i>  an  organic  whole,  in  which 
no  factors  exist  "pure,  '  and  in  which  there  is  consfunt  give 
and  take.  The  effort  to  explain  moral  values  by  a  single 
principle  as  sympathy,  legal  values  by  another  simple  prin- 
ciple, as  fear,  and  economic  values  by  a  different  simple 
principle,  as  uliiity,  is  foredcMJmed.  It  has  been  given  up 
by  the  students  <>(  law  and  moniis.  and  should  be  abandoned 
by  the  students  of  economics. 

Let  us  consider  more  narrcnrty  the  main  factors  affecting 
and  explaining  economic  sociui  values.  Let  us  take,  first, 
the  simplest  case,  that  of  goo<i.->  and  services  which  minister 
directly  to  human  wants,  goods  and  services  "of  the  first 
order."  Goods  of  this  sort  would  be  oranges,  bread,  cloth- 
ing, jewels.  Services  of  this  sort  'vould  be  the  services  of 
the  barber,  the  valet,  the  physician,  the  preacher,  the 
teacher,  the  actor.  I  abstract,  in  discussing  these  values, 
from  the  complications  that  grow  out  of  the  friction  in  retail 
trade,  and  the  existence  of  man\-  customary  prices,  and 
prices  fixed  by  other  than  economic  values,  in  the  case  of 
teachers,  or  preachers.  I  shall  concentrate  attention  upon 
such  things  as  oranges,  bread,  clothing,  and  jewels.  The 
focus  of  the  values  of  these  things,  and  an  essential  condi- 
tion of  their  existence,  is  their  utility,  that  is  to  say,  their 
power  to  satisfy  human  wants.  Utility  as  used  in  economics 
does  not  mean  usefulness  in  any  moral  sense.  From  the 
standpoint  of  the  economist,  whiskey  and  opium  are  as 
u.scful  as  bread,  if  they  satisfy  wants  equally  intense.  And 
the  economist  is  not  concerned  with  the  general  utility  of 
things  considered  in  their  totality.  .\ir  is  more  useful  than 
jewels,  but  a  carat  of  air  is  not  as  useful  a-  a  one-carat 
diamond.    Air  exists  in  such  abundance  that  it  does  not 


ECONOMIC  VAIl^ 


35 


need  to  be  economized.  Scarcity  witli  reference  to  the  ex- 
tent of  the  wants  involved  is  also  essential  to  econi)mic 
value.  A  combination  of  the  i<k'as  of  utility  and  scarcity 
gives  us  the  simple  notion  for  which  the  formidable  name  of 
"marginal  utility"  has  been  devised.  The  marginal  utility 
of  a  gootl  to  a  man  is  the  jxiwer  the  last,  or  "marginal," 
unit  of  the  gotxl  which  the  man  consumes  has  to  give  him 
satisfaction,  <>r,  viewed  from  the  stand|)oint  of  the  man,  is 
the  intensity  of  his  desire  '  for,  or  of  his  satisfaction  in.  the 
tinal  unit  consumed.  So  far,  our  account  of  the  value  of  the 
orange  will  seem  perfectly  acceptable  to  those  accustomed 
to  traditional  discussions  of  the  problem  in  the  text-books. 
The  difference  is  that  many  text-books  si.>p  at  this  point, 
leaving  the  impression  that  with  the  definition  of  marginal 
utility  the  whole  value  problem  has  been  solved.  For  the 
social  value  theory,  the  conception  of  marginal  utility  is 
barely  a  starting  point.  Indeed,  it  is  not  even  a  starting 
point.  We  shall  have  to  look  both  in  front  of  it  and  behind 
it.  Recognizing  that  marginal  utilities  to  individuals  are 
essential  to  economic  values  of  consumption  goods,  we 
shall  have  to  point  out  other  things  which  are  also  essential, 
and  we  shall  have  to  explain  the  factors  determining  these 
marginal  utilities  themselves. 

The  last  point  may  be  considered  first.  Men's  desires 
are  socially  determined.  Even  the  simplest,  most  instinc- 
tive, wants  of  human  nature  are,  in  their  concrete  mani- 
festations, the  product  of  social  culture  in  overwhelming 
degree.  Consider  sex  and  hunger.  We  do  not  enjoy  our 
food  when  our  neighbors  pick  their  teeth  with  their  forks. 
This  would  not  trouble  a  chimpanzee,  whose  instinctive 
equipment  in  the  matter  of  hunger  is  vast);  more  like  that 

'Neither  "desire"  nor  "s.atisf.artinn"  is  re-iUv  artiirri';-  here,  h«t  T  do 


not  wish  to  digress  for  a  discussion  of  the  psychology  of  \-aluL-  in  the  individ- 
ual mind.  The  present  argument  can  be  develo[)ed  without  it.  The  matter 
is  discussed  in  detail  in  ch.  lo  of  Sociai  Value. 


36 


THE   VALUE   OF  MONEY 


I 


of  a  man  than  h  the  actual  hunger  impulse  of  a  highly 
,W\y  n  like  that  of  a  savage.     Civilized  men  will 

<,ften  starvi-  rathrr  than  eat  human  tlesh.    Even  when  moral 
scrupUs    are    overci.me,    actual    physical    revulsion    may 
prevent  it     ^len  of  different  times  and  places  wish  iood 
<,f  special  sorts,  served  in  special  ways.    They  wish  to  eat 
in  the  company  of  their  fellows,  but  only  of  those  fellows 
who  can  know  and  obey  the  ritual  that  is  appropriate  to 
the  time  and  place.    This  is  true  of  humble  folk  as  of  those 
who  "dress  for  dinner."    The  ritual  difTers  for  the  two 
sorts  of  people.   But  there  is  a  spirit,  a  type  of  conversation 
a  code  of  etiquette,  which  prevails  at  the  mealtime  of 
virtually  all  men,  and  too  serious  digressions  therefrom 
will  take  away  the  appetites  of  all.    About  the  mealtime 
and  the  festal  board  have  gathered  a  great  host  of  tradi- 
tions, ideals,  and  social  activities,  till  they  have  become 
in  verity  an  institution,  and  not  the  least  important,  by 
any  means,  of  social  insUtutions.    Out  of  the  simple  in- 
stinct of  sex,  we  have  evolved  many  of  the  most  precious 
things  of  our  civilization,  and  between  the  sex  im,     se 
of  the  animal  and  the  sex  impulse  of  the  gentleman  who 
is  seeking  to  marry  the  one  woman  in  all  the  world,  there 
is  a  difference  so  great  that  comparison  between  the  two 

is  difficult.  , 

Here  we  have  wants  which  grow  out  of  the  most  elemen- 
tary things  in  human  nature,  wants  which  are  intense  and 
universal,  but  which  vary,  in  their  concrete  manifesta- 
tions, enormously  from  age  to  age  and  from  place  to  place. 
When  we  come  to  the  wants  which  change  more  quickly, 
the  fact  that  social  factors  dominate  needs  no  arguing. 
Fashion,  mode,  custom,  obviously  account  for  the  concrete 
wants  that  exist  in  clothing,  ornamentation,  amusement, 
housing,  etc.  If  we  wish  to  know  what  women  will  be 
wanting  to  wear  six  months  hence,  we  do  not  go  to  women 


ECONOMIC  VALUE 


37 


individually  and  ask  them.    We  could  not  find  out  that 
way.    They  would  not  know.    We  go  rather  to  the  theatre, 
and  study  the  stage  and  the  bo.xes.  to  the  famous  designers 
of  women's  dress,  to  the  metropolitan  centres  of  various 
sorts,  to  the  "radiant  points  of  social  control"  '  from  which 
emanate  the  suggestions  which  pass  in  imitative  waves 
through  the  women  of  the  country  in  the  next  few  months. 
The  laws  of  imitation  have  been  elaborately  developed 
by  Bagehot,  Tarde,  Baldwin,  Ross,  LeBon,  Cooley.  and 
others,  and  I  content  myself  here  with  referring  to  their 
writings.    The  wants  of  women— and  men— are  socially 
given,  grow  out  of  a  give  and  take,  a  social  process.    And 
in  this  social  process,  it  is  not  true  that  each  man  counts 
one!     Rather,  a  few  lead,  and  many  follow.     There  are 
centres  of  prestige  which  count  overwhelmingly. 

Certain  wants  are  competitive.^  Where  socir.l  -..tatus 
depends  on  having  as  good  a  house  as  one's  neighbors,  and 
where  social  leadership  depends  on  having  a  better  house 
than  one's  neighbors,  the-e  is  no  limit  to  men's  desires 
for  better  houses.  With  each  improvement  which  one 
introduces,  each  feels  the  desire  to  improve,  however  con- 
tented he  might  have  been  had  the  other  not  made  the 
improvement.  To  this  we  shall  recur  in  our  discussion 
of    the  origin   of    money,   in    explaining    the   value   of 

gold. 

So  much  for  the  human  wants  which  stand  as  the  focus 
of  economic  values  in  the  case  of  articles  of  immediate 

consumption. 

But,  given  these  wants,  and  given  their  marginal  m- 
tensities,  we  are  only  at  the  beginning  of  our  explanatio-^ 
of  the  economic  values  of  the  consumption  goods.    It  is 

I  Ross,  K.  A.,  Social  Psychology,  passim. 

*  Cf.  Veblen,  T.  B.,  Theory  of  the  Leisure  Class,  and  Carhle,  W .  W.,  Evolu- 
lion  oj  Modern  Money. 


38 


THE  VALUE  OF  MONEY 


again  not  a  case  of  each  want  counting  one,  to  the  extent 
of  its  intensity.  There  are  again,  by  virtue  of  the  legal 
and  moral  values  governing  the  distribution  of  wealth, 
centres  of  power.  The  wants  of  some  men  count  for  nothing, 
however  intense  they  may  be.  The  pauper,  the  prisoner, 
the  beggar— popular  proverb  about  "beggars  and  horses" 
understands  them,  however  much  the  "marginal  utilita- 
rian" may  forget  that  their  wants  count  for  nothing.*  The 
slightest  whim,  on  the  other  hand,  of  the  man  who  has 
inherited  millions  may  count  heavily  in  giving  values  to 
goods.  For  the  explanation  of  the  values  of  consumption 
goods,  then,  we  need  both  the  socially  determined  marginal 
utilities  of  individuals,  and  the  socially  determined  weight 
which  these  individuals  have  in  our  economic  system. 
This  weight  would  involve  a  very  elaborate  explanation. 
Many  factors  affect  it.  We  call  attention  here,  however, 
especially  to  the  fact  that  it  rests  in  large  part  on  the  legal 
and  moral  values  and  institutions  concerned  with  the  dis- 
tribution of  wealth.  Changes  in  the  distribution  of  wealth 
are  as  important  as  changes  in  the  wants  themselves  in 
giving  the  explanation  of  changes  in  values.  The  economic 
social  values  of  consumption  goods  include  not  merely 
the  values  of  those  goods  to  the  individuals  who  consume 
them,  but  also  the  values  of  the  individuals  themselves 
in  the  social  scheme  of  things. 

What  of  the  values  of  instrumental  goods,  of  goods  of 
"higher  orders,"  of  labor,  of  stocks  and  bonds,  of  lands, 
of  franchise  rights  and  good  will? 

It  is  the  one  great  contribution  of  the  Austrian  econo- 
mists to  have  shown  that  the  causation  in  value  runs, 
primaril}-,  from  consumption  goods  to  the  goods  of  higher 
"orders"  which  are  concerned  with  their  production,  and 
that  these  values  of  instrumental  goods,  etc.,  are  derived 

'  Hucial  Value,  chs.  3-7,  csj).  ch.  5. 


ECONOMIC  VALUE 


39 


and  secondary  values.  The  value  of  wheat  is  based  on 
the  value  of  bread,  the  value  of  land  on  the  value  of  wheat. 
The  value  of  the  stock  of  United  States  Steel  rests  in  part 
on  the  value  of  iron  lands,  which  rests  on  the  value  of  ore, 
which  rests  on  the  value  of  pig  iron,  which  rests  on  the 
value  of  steel  rails,  which  rests  on  the  value  of  the  service 
of  transporting  building  materials,  which  rests  on  the 
value  of  a  building,  which  rests  on  the  value  of  the  services 
which  a  dentist  performs  in  an  office  in  the  building.  This 
is  the  main  line  of  causation.  This  is  the  first  approxima- 
tion which  gives  us  a  clue,  without  which  we  should  find 
problems  insoluble.  But  is  it  not  clear  that  this  cannot 
be  the  whole  story?  At  every  step  complications  enter. 
The  whv'  thing  cannot  be  got  out  of  the  value  of  the  den- 
tist's services,  and  the  other  consumers'  goods  and  services, 
which  are  indirectly  aided  by  the  property  to  which  title 
is  given  by  ownership  of  U.  S.  Steel  stock;  nor  is  the  value 
of  the  stock  to  be  fully  explained  by  the  value  of  the  prop- 
erty to  which  it  gives  title. 

At  every  step,  we  meet  the  complication  thcU  men  must 
estimate  and  calculate,  for  one  thing.  And  rarely  indeed 
can  men  see  all  the  steps,  the  end  from  the  beginning. 
Take  first  a  very  simple  case,  wheat  land.  The  value  of 
the  wheat  land  of  to-day  rests  on  the  value  of  wheat,  but  it 
is  the  wheat  of  to-morrow  and  for  many  years  to  come;  the 
wheat  of  to-morrow  rests  for  its  value  on  the  value  of  the 
bread  of  the  day  after  to-morrow.  Sometimes  the  differen- 
tial between  goods  at  two  consecutive  steps  in  the  produc- 
tive process  is  pretty  constant.  Wheat  and  flour  vary  pretty 
closely  together.  The  differential  is  not  strictly  fixed  even 
there.  But  bread  and  wheat  lap<l  have  a  much  looser  con- 
nection in  their  variations.  If  land  could  produce  no  wheat 
or  com  or  other  good  that  would  satisfy  human  wants,  and 
if  it  could  not  itself  satisfy  human  wants,  it  would  ordinarily 


40 


THE  VALUE   OF  MONEY 


have  no  value.*  But  the  connection  between  the  value  of, 
the  bread  and  the  value  of  the  land  is  loose  and  uncertain, 
while  the  connection  between  the  value  of  the  land  and  the 
intensity  of  the  wants  actually  satisfied  by  the  bread  pro- 
duced from  it,  is  absolutely  nil.  Whether  the  bread  saves 
a  starving  man  or  feeds  the  pet  pigeons  of  a  millionaire,  is 
a  matter  of  indifference  so  far  as  the  value  of  the  land  (or  of 
the  bread)  is  concerned. 

We  take  the  values  of  consun-  -ion  goods,  and  break 
them  up,  attributing  part  to  th.  .abor  that  immediately 
produced  them,  part  to  the  raw  materials  that  entered  into 
them,  part  to  the  machine  that  fashioned  them,  and  so  on. 
We  then  break  up  the  value  attributed  to  the  raw  material, 
attributing  part  to  the  labor  that  worked  in  producing  it 
immediately,  part  to  the  machine  that  fashioned  it,  part  to 
the  rawer  material  of  which  it  was  made.  And  so  with  the 
values  of  the  machines.  Ultimately  we  get  back  to  the 
values  of  labor,  or  of  land,  or  of  securities  giving  title  to 
complexes  of  lands,  machines,  etc.— values  which  we  do 
not  further  break  up.  But  at  every  step,  we  find  additional 
factors.  We  find  hese  derived  values  becoming  independ- 
ent, substantial,  standing  in  their  own  right.  Moral  and 
legal  values  affect  them  directly,  as  in  the  case  of  patriotic 
support  of  government  securities,  moral  antagonism  to  the 
securities  of  the  Distillers'  Securities  Corporation,  or  the 
influence  of  court  decisions,  legislation  and  elections  on  se- 
curity values.  Such  values  rest,  in  large  degree,  on  the 
massing  of  beliefs  and  hopes,  not  concerned  with  specific 
.satisfactions  of  wants,  but  with  the  existence  of  Jutiirc  eco- 
nomic values.  These  beliefs  and  hopes  again  have  their  so- 
cial explanation.     It  is  not  a  case  where  each  man  counts 


'  Hul  land  rl(Ks  ofltii  have  value  which  it  is  im|K>s.sihIe  to  exi)lain  on  the 
li.isis  (if  an\  in-omc  «iiii.li  may  reasonably  be  e.\|>ected  from  it,  even  in 
the  remote  future. 


ECONOMIC  VALUE 


41 


one.  There  are  centres  of  prestige  and  power,  bankers  and 
financial  magnates,  whose  opinions  and  decisions  count 
heavily,  and  waves  of  optimism  and  pessimism,  which  affect 
the  whole  group.  We  shall  discuss  these  matters  more 
fully  in  connection  with  the  analysis  of  credit,  at  a  later 
point  of  our  study.  For  the  present,  it  is  enough  to  point 
out  that  the  whole  thing  cannot  be  explained  on  the  basis 
of  the  values  of  consumers'  goods,  and  that  the  values  of 
consumers'  goods  are  only  in  small  part  explained  by  the 
intensities  of  the  wants  they  serve. 

In  summary:  Economic  value  is  the  common  quality  of 
wealth,  by  virtue  of  which  it  is  possible  to  compare  divers 
kinds  of  wealth,  and  treat  wealth  quantitatively,  getting 
ratios  of  exchange,  sums  of  wealth,  etc.  Value  is  a  quan- 
tity, /.  e.,  a  quality  which  has  degrees  of  intensity.  Ratios 
of  exchange  are  ratios  between  values.  Price  is  a  particular 
sort  of  ratio  of  exchange,  namely,  a  ratio  in  which  one  of 
the  terms  is  the  value  of  the  money-unit.  Prices  correctly 
express  values  on  the  assumption  of  the  fluid  market,  and 
on  the  assumption  that  the  value  of  the  money-unit  does 
not  vary. 

The  value  quality  is  psychological  in  character.  It  rests 
in  human  minds.  But  not  in  the  minds  of  individuals 
thought  of  separately.  It  is  a  complex  of  many  individual 
mental  activities,  highly  institutionalized,  and  including 
legal  and  moral  values,  hopes  and  beliefs  and  expectations, 
as  well  as  the  immediate  intensities  of  men's  wants  for  con- 
sumption goods. 

The  ultimate  test  of  scientific  theory  must  be  practice. 
If  a  theory  aids  in  mam'pulating  facts,  if  it  leads  to  the  dis- 
covery of  ways  of  doing  things  which  are  better  than  old 
ways,  if  it  solves  problems  which  have  hitherto  remained 
unsolved,  or  carries  the  solution  of  problems  farther  than 
has  hitherto  been  the  case,  it  is  a  good  theory.     It  need  not 


4* 


THE   VALUE  OF  MONEY 


be  the  best  possible  theory.    It  need  not  l 
The  chief  claim  for  the  present  theor}  of  valu 
only  unlocks  all  the  doors  that  earlier  theories  aav*. 
locked,  but  also  others  which  have  resisted  the  old  kev 
The  man  who  goes  into  the  modern  stock  market  armed 
with  marginal  utility  and  the  quantity  theory  is  like  the 
man  who  would  fight  Hindenburg  with  bows  and  arrows. 
Bows  and  arrows  are  effective  in  the  hands  of  expert  archers, 
and  the  great  figures  in  the  history  of  economics  have  done 
wonderful  things  with  marginal  utility,  "real  costs,"  and 
the  quantity  theory.    But  the  social  value  theory  is  offered 
as  a  better  weapon. 

The  writer  believes  that  the  problem  of  the  value  of 
money  has  not  been  solved  by  the  older  theories  of  value. 
He  believes  that  the  social  value  theory  will  solve  it.  He 
proposes  on  the  basis  of  the  social  value  theory  to  make 
clearer  the  nature  of  credit  phenomena,  and  to  assimilate 
the  laws  of  credit  to  the  general  laws  of  value.  He  pro- 
poses with  the  social  value  theory  to  bring  together  in  a 
higher  s}'nthesis  two  divergent  types  of  economic  theory, 
the  "static"  and  the  "dynamic."  He  thinks  that  a  rigo- 
rous and  consistent  application  of  the  absolute  concept  of 
value  will  clarify  confusions  at  various  points  in  the  general 
body  of  price  theory,  as  the  laws  of  supply  and  de- 
mand, etc. 

He  offers  the  social  value  theory  as  the  only  way  of  giv- 
ing a  psychological  explanation  to  the  demand-curve,  and  a 
marginal  value  explanation  of  marginal  demand-/>rK;c.  De- 
mand-curves arc  social  value  curves,  on  the  assumption  of 
the  fixed  social  value  of  the  dollar.  The  utility  theory,  as 
will  appear  in  the  chapter  on  "Marginal  Utility,"  has 
failed  to  give  psychological  magnitudes  corresponding  to 
any  point  on  the  demand -curve.  In  general,  he  offers  the 
social  value  notion  as  the  justification  for  the  assumption 


ECONOMIC  VALUE 


43 


of  a  quantitative  value  which,  as  we  shall  see,  underlies  the 
whole  of  our  current  price  analysis. 

The  theory  here  outlined  has  been,  as  stated,  developed 
and  defended  more  fully  in  a  previous  book.  For  the  rest, 
the  author  would  have  it  judged  by  its  usefulness  or  failure 
as  a  tool  of  thought  in  the  investigations  which  follow. 


Note.  It  has  seemed  best  not  to  break  the  main  course  of  the  argu- 
ment of  this  chapter  for  the  elaboration  of  one  point  on  which  there 
has  appeared  to  some  critics  to  be  vagueness  in  the  exposition  of  the 
social  value  theory  in  my  earlier  volume,  namely,  the  relation  of  social 
values  to  the  individual  values  of  those  who  are  moved  by  the  social 
values.  Social  values  have  as  their  function  the  guidance  and  control 
of  the  activities  of  men.  But  men  are  also  moved  by  their  own  in- 
dividual feelings,  interests,  and  desires. 

What  is  the  relation  between  these  two  sets  of  factors?  In  what ' 
has  gone  before,  it  has  been  made  clear  that  social  values  present 
themselves  to  the  individual  as  opaque,  objective  facts,  largely  be- 
yond his  control,  to  which  he  must  adjust  himself.  They  represent 
the  minds  of  other  men,  acting  in  corporate  and  organic  ways,  put- 
ting pressure  on  him,  or  offering  him  lures.  Now  the  individual 
reckons  with  these  social  values  in  the  same  way  that  he  reckons  with 
any  other  of  the  facts  affecting  the  economy  of  his  life.  He  must 
adjust  himself  to  them  in  the  same  way  that  he  must,  if  he  is  a  black- 
smith, adjust  himself  to  the  technical  qualities  of  the  iron  he  is  manip- 
ulating. This  docs  not  mean  that  he  is  passive  before  them,  any  more 
than  he  is  passive  before  the  iron.  He  rather  seeks  to  carry  out  his 
personal  purposes  and  desires  by  actively  adapting  imself  to  objec- 
tive facts,  whatever  they  be.  This  means  that  ditTercnt  individuals 
will  react  in  different  ways  to  the  same  social  value.  The  fear  of 
the  law  will  keep  one  man  from  burning  dead  leaves  in  the  street 
where  it  will  not  keep  another  man  from  murder.  A  given  degree 
of  social  pressure  will  make  one  man  crease  his  trousers,  while  another 
man  will  not  even  know  that  the  pressure  to  crease  one's  trousers 
exists!  There  are  great  individual  variations  in  responsiveness  and 
sensitiveness  to  social  pressure.  In  part,  these  variations  arc  due  to 
inborn  qualities.  In  larger  part,  they  are  due  to  social  education, 
and  to  social  status.  Thus,  the  fact  that  one  man  will  work  all  day 
in  a  ditch  in  response  to  the  lure  of  a  dollar  and  a  half,  while  another 


44 


THE  VALUE  OF  MONEY 


will  not  work  in  the  ditch  for  a  hundred  dollars  a  day,  may  rest  in 
slight  degree  on  the  greater  inborn  sensitiveness  of  the  latter  to  the 
physical  pain  of  labor,  but  rests  primarily  on  the  fact  that  the  latter 
doesn't  need  the  money,  and  has  a  social  standard,  growing  out  of 
his  class-associations  and  education,  which  would  make  him  ashamed 
to  \w  seen  in  the  ditch.  Indeed,  we  may  think  of  the  social  standard 
in  question  as  a  social  value  acting  on  him,  rather  than  in  him. 
He  fears  ridicule.  The  siimc  degree  of  social  power,  luring  men 
toward  the  ditch,  exists  in  the  dollar  in  each  case,  but  the  response 
is  very  different  in  the  two  cases. 

Later  formulations  of  the  utility  theory  and  the  labor  cost  theory, 
as  represented  by  the  theory  of  Schumpeter,  which  we  shall  discuss 
in  the  chapter  on  "Marginal  Utility,"  give  us,  in  a  scheme  of  purely 
static  equilibrium,  a  picture  of  the  adjustment  of  the  individual 
values  to  the  social  values.  As  we  shall  see,  they  give  us  no  account 
whatever  of  the  social  values.  They  do  not  explain  causation  at  all. 
But  they  do  show  that  there  is  a  tendency  for  the  individual  marginal 
utilities  of  consumption  to  become  proportional  to  the  social  values 
of  the  goofls  consumed  by  each  individual;  and  for  the  individual 
marginal  disutilities  in  production  to  become  proportional  to  the 
social  values  of  the  rewards  that  come  to  producers.  The  scheme  is 
highly  unrealistic.  It  has  been  emphatically  repudiated  by  Bohm- 
Bawcrk,  so  far  as  the  disutility  equilibrium  is  concerned.  ("  Ultimate 
Standard  of  Value,"  Annals  of  the  American  Academy,  Vol.  V,  pp. 
I4Q-20Q.)  But  it  is  worth  something,  not  as  explaining  social  values 
or  market  prices,  but  rather,  as  showing  how  individuals  conform  to 
social  values  and  market  prices.  Cf.  Social  Value,  pp.  43-44.  "•  2, 
and  148. 

The  theory  that  individual  marginal  utilities  and  disutilities  are 
proportional  to  market  values  is  unrealistic  enough,  in  the  light  of 
the  analysis  of  individual  utilities  which  we  have  given,  even  for  the 
utilities.  It  ?s  quite  impossible  to  make  anything  of  importance 
of  it  from  the  side  of  individual  disutilities.  The  length  of  the  work- 
ing day  is  not  fixed  for  each  woiker  oy  a  comparison  of  his  own  lal)or 
pain  with  the  satisfactions  he  expects  from  his  wages.  It  is  fixed  by 
voixiitions  largely  external  to  him,  and  the  whole  group  works  the 
same  number  of  hours,  with  the  machine.  The  law  may  limit  the 
working  day.  Trades-union  effort  may  do  it.  Opportunities  for 
alternative  employment  may  do  it,  for  the  laljor  force  of  a  factory  as 
a  whole.    But  the  theor>',  which  really  must  rest  in  the  notion  that 


[L.. 


ECONOMIC  VALUE 


45 


each  individual  has  many  options,  and  that  the  working  period  is 
flexible,  cannot  mean  much.  The  prosperity  of  the  laborer  does  more 
to  limit  the  working  day  than  does  his  suffering! 

The  reactions  of  individuals  as  consumers  or  producers  on  the 
social  values  modify  the  social  values.  But,  as  we  have  shown,  the 
primary  explanation  of  the  social  values  is  not  to  be  found  in  the 
individual  utilities  and  disutilities  of  those  who  react  to  them.  Utili- 
ties and  labor  pains  are  parts,  but  minor  parts,  in  the  explanation 
of  social  values. 


CHAPTER  II 

SUPPLY  AND  DEMAND,  AND  THE  VALUE  OF 

MONEY 

The  theory  of  the  value  of  money  is  a  special  case  of  the 
general  theory  of  economic  value.  To  the  layman,  this 
would  seem  to  go  without  saying.  To  the  student  of  the 
literature  of  the  subject,  however,  who  has  noticed  the  wide 
divergence  between  the  method  of  approach  to  the  general 
problem  of  value  and  the  method  of  approach  to  the  problem 
of  the  value  of  money,  in  most  treatises  which  include  both 
these  topics,  the  proposition  will  sound  unusual  if  not  heret- 
ical. Most  text-books  in  English  to-day  will  ofTer  the  mar- 
ginal utility  theory  as  the  general  theory  of  value.  The  same 
books  commonly  present  the  quantity  theory  of  the  value  of 
money.  Whether  or  not  the  two  theories  are  consistent 
may  wait  for  later  discussion,  but  that  the  quantity  theory 
of  money  is  a  deduction  from  the  utility  theory  of  value,  and 
a  special  case  of  the  utility  theory  of  value,  will  not,  I  be- 
lieve, be  contended  by  anyone.  Certainly  in  its  origin,  the 
quantity  theory  is  much  the  older  theory.  The  same  is 
true  for  those  writers  who  seek  to  explain  value  in  general 
on  the  basis  of  cost  of  production,  and  who  at  the  same  time 
offer  the  quantity  theory  to  explain  the  value  of  money. 
The  two  theories  may  or  may  not  be  consistent,  but  in  any 
case,  they  are  logically  and  historically  independent, 
neither  being  a  deduction  from  the  other.  Older  writers 
(as  Walker  and  Mill),  whose  treatment  of  the  general 
theory  of  value  runs  in  terms  of  "supply  and  demand." 
have  stated  that  the  quantity  theory  is  merely  a  special  case 
of  the  law  of  supply  and  demand,  and  the  statement  is 

46 


SUPPLY  AND  DEMAND 


47 


occasionally  met  in  present-day  writings,  though  one  of  the 
most  recent  and  best  known  of  the  expositions  of  the 
quantity  theory,  Professor  Fisher's  Purchasing  Power  of 
Money,  very  explicitly  repudiates  this  doctrine.'  But  it 
may  be  easily  shown,  and  will  be  shown  later,  that  the 
quantity  theory,  and  the  present-day  formulation  of  the 
law  of  supply  and  demand,  are  in  no  way  logically  depend- 
ent upon  each  other.  This  lack  of  connection  between  two 
bodies  of  doctrine  which  should  be  in  a  most  intimate  and 
essential  way  related  to  each  other,  may  well  throw  sus- 
picion on  the  current  treatments  of  both  topics.  In  any 
case  the  lack  of  connection  raises  a  problem,  and  calls  for 
explanation. 

Part  of  the  explanation  may  be  sought  in  the  fact  that 
the  writers  who  have  developed  the  general  theory  of  value 
have  not  been,  in  general,  the  writers  who  have  most 
elaborated  the  theory  of  the  value  of  money.  The  theory 
of  money  has  been  for  a  long  time  a  more  or  less  isolated 
discipline.  In  Ricardo,  we  have  an  elaboration  of  the  labor 
theory  of  value,  and  we  also  have  the  quantity  theory  of 
money.  But  it  is  no*  clear  that  Ricardo  added  anything  to 
the  quantity  theory.  He  found  it,  in  much  the  form  in 
which  he  used  it.  in  the  writings  of  predecessors,  among 
them  Locke  and  Hiune.  Ricardo  makes  large  use  of  the 
quantity  theory  as  a  premise,  but  apparently  feels  the 
theory  to  be  so  self-evident  that  it  needs  little  exposition  or 
defence  at  his  hands.  John  Stuart  Mill  is  a  clear  exception 
to  the  general  statement.  Cairnes,  likewise,  did  treat  both 
topics  in  considerable  detail,  but  while  his  interest  in  the 
general  theory  of  value  was  that  of  the  theorist,  his  treat- 
ment of  money  was  primarily  in  the  spirit  of  the  publicist, 
and  his  interest  was  less  in  the  justification  of  the  theory — 
which  he  again  set  ms  to  feel  needs  little  defence — as  in  its 

'P.  174. 


AH 


THE   VALl'I.  OF   MONEY 


I!' 


I 


t 


application.  A  similar  stalcmcnt  may  bt'  made  with  rcfcr- 
encf  to  Jt'vons.  He  worked  out  his  jji-neral  theory  of  value 
for  its  own  ^ake;  his  utteranies  on  the  theory  o(  the  value 
•f  money  must  be  sought  scattered  through  his  practiial 
writings  an  money.  Alfred  Marshall's  Principles  (Vol.  I) 
says  almost  nothing  about  the  theory  of  money;  his  opinions 
on  that  subject  are  to  be  lound  in  some  ex  cathedra  replies 
to  quesluons  from  a  Parliamentary  Commission.  The  most 
im{M)rtant  diseu.ssions  in  Kngland  of  the  value  of  muney  ari> 
to  be  found  in  the  long  polemic  between  the  Curremy  and 
the  Banking  Schools,  by  writers  who  would  not  be  listed 
among  the  makers  of  tht  general  theory  of  value.  In  the 
Unitetl  States  to-day,  with  the  exceptions  of  Professors 
Fisher  and  Tjtussig,  the  writers  who  have  been  Interested 
in  the  general  tield  of  economic  theory  have  done  com- 
paratively little  with  the  value  of  money  (c.  g.,  Profes.sors 
Claak  and  Fetter),  and  the  writers  who  have  been  most 
inteaested  in  the  value  of  money  have  usually  not  written 
larpriy  on  the  general  theory  of  value  (f.  g..  Professors 
Laufhlin.  Scott,  Kinley).  Profes.sor  Kemmerer  might  well 
be  JBcluded  as  an  illustration  of  this  last  statement.  His 
prinaBBT}'  interest  is  in  money,  rather  than  general  theory, 
even  though  he  does  precede  his  theory  of  the  value  of 
money  with  an  exposition  of  the  utility  theory  of  value. 
In  German,  a  similar  situation  obtains.  Bohm-Bawerk  has 
toucfted  the  theory  of  money  scarcely  at  all.  Menger  has 
written  an  important  article  on  "(ield"  in  the  Hatul'wurlcr- 
buch  der  Stdatsu'issenschaften.  but  the  important  thing  about 
this  article  is  the  theory  of  the  origin  of  money,  and  the 
reader  will  llnd  little  on  the  problem  of  the  value  of  money. 
Wieser  has  recently  taken  up  the  value  oi  money  (in  articles 
published  in  1904  and  1900),  but  no  trace  of  his  views  has  as 
yet  manifested  itself  in  the  English  literature  on  money, 
and  the  writer  may  here  express  the  opinion  that  Wieser's 


SUPPLY  AND  DEMAND 


49 


contributions  to  the  thcorj-  of  money  are  not  likely  to  be 
very  intluentii<l,  or  to  add  to  his  reputation.'  Austrian 
writers  on  the  value  of  money,  as  Wieser  an<l  von  Miscs, 
have  recognised  more  clearlj-  than  anyone  in  America  or 
Knglanci,  the  essential  dependence  of  the  theory  of  the 
value  of  mone\  on  the  general  theory  of  value.  The  Ger- 
man writer  on  money  who  has  attracted  most  attt-ntion 
recen!)y,  however,  G.  F.  Knapp,  troubles  himself  about  the 
general  theory  of  value  not  at  all. 

But  the  main  exjilanation  of  the  hiatus  between  the  two 
bodies  of  literature  and  doctrine  is  to  be  sought  in  some- 
thing more  fundamental.  Neither  utility  nor  costs  nor 
supj>ly  and  demand  furnishes  an  adequate  basis  from  which 
the  quantity  theory,  or  any  other  theory  of  the  value  of 
money  can  be  deduced.  The  cost  theory,  anu  the  supply 
and  demand  theory,  in  their  present-day  formulation,  are 
reall)  not  theories  of  value  at  ail,  but  are  theories  of  prices, 
theories  which  presuppose  value,  and  money,  and  a  Jixed 
value  of  money.  And  the  utility  theory,  as  usually  pre- 
sented, is  either  a  theory  of  barter  relations,  or  else  (more 
commonly)  speedily  settles  down  into  the  grooves  of  supply 
and  cicmand,  leaping  by  means  of  a  confusion  of  utihty 
curves  and  demand-curves  for  sometimes  by  a  deliberate 
identification  of  them,  r.  g.,  Flux  and  Taussig-)  to  the 
treatment  of  market  prices.  I  shall  take  up  these  points  in 
order. 

A  historical  summary  of  the  development  of  the  notions 
of  supply  and  demand  will  aid  the  exposition.  It  may  be 
noticed,  first  of  all,  that  supply  and  demand  is  really  a  very 
superficial  formula  even  though  an  exceedingly  useful  one. 

'  Cj.  the  discussion  of  Wiesi-r,  Schum|)cter  and  von  M'.scs  in  the  chapter 
on  "Maruinal  Utility,"  infra. 

-  Flux,  \V.  A..  I'.i imomk  Primiplrs,  London,  1004,  pp.  4,  21,  29;  Taussig, 
1".  \V.,  Principli  ■.  rf  Ecottomks,  New  York,  1911,  vol.  1,  pp.  141-143.  if.  aiy 
Social  Value,  th.  5. 


so 


THE   VALIE   OF   MONEY 


H 


By  virtue  of  its  superficial  character,  it  antagonizes  few 
other  theories,  and  it  has  been  the  common  property  of 
almost  all  schools  of  value  theory.     Cost  theories     '/) 
utility  theories,  labor  theories,  or  social  value  theoric-i;      ' 
find  use  for  it,  in  one  form  or  another.    It  is  really  q  .  ' 
neutral  and  colorless,  so  far  as  the  ultimate  questions  of 
value-causation  are  concerned.     The  mo  e  fundamental 
causal  factors  offered  by  one  theory  or  another  are  com- 
monly supposed  to  operate  through  supply  or  demand,  in 
price-determination.    Adam  Smith  seems  to  see  this  more 
clearly  than  does  Kicardo.     Ricardo,  indeed,  sometimes 
thought  of  demand  and  supply  as  forces  antithetical  to  the 
forces  of  labor-costs  which  he  was  considering.    In  ch.  xxx 
of  his  Principles  of  Political  Economy  and  Taxation  (ed. 
McCulIoch,  pp.  232fT.)  he  holds  that  his  natural  value  ulti- 
mately rules,  except  (p.  234)  in  the  case  of  monopolized 
articles.    Supply  and  demand  govern  the  prices  of  monop- 
olized articles  and  of  all  articles  in  the  short  run.    I  do  not 
find  in  Ricardo  any  clear  statement  to  the  effect  that  cost 
of  production  operates  through  influence  on  supply.    Neither 
Adam  Smith  nor  Ricardo  felt  the  need  of  very  much  preci- 
sion in  the  definition  of  supply  and  demand.    Smith  does, 
indeed,  distinguish  "effectual"  from  "absolute"  demand, 
in  a  well-known  passage  (ed.  Cannan,  I,  p.  58),  defining 
effectual  demand  as  the  demand  of  the  effectual  demand- 
ers.  /.  c,  these  who  are  willing  to  pay  the  "natural  price" 
of  the  commodity.     The  term  "supply"  he  does  not  use 
in  this  passage,  but  speaks  of  the  "quantity  which  is  ac- 
tually brought  to  market, '  and  gives  as  the  law  of  market 
price  that  it  is  determined  by  the  "proportion"  between 
this  quantity  and  the  effectual  demand.     That  much  is 
wanting  in  this  analysis  will  be  sufficiently  clear  when  the 
views  of  J,  S.  Mill  and  Cairnes  are  considered.     Ricardo 
otTcrs  even  less  than  Smith  in  the  way  of  delinition.    The 


«) 


SUPPLY  AND  DEMAND 


s> 


reader  may  compare  the  pages  in  Ricardo^s  Works  cited 
above,  and  the  discussion  of  the  demand  for  labor  on  p.  241 
in  the  same  volume. 

In  J.  S.  Mill,  a  clean-cut  notion  first  appears.  The  doctrine 
that  price  is  determined  by  a  ratio  between  effectual  demand 
{i.  e.,  the  wish  to  possess  combined  with  the  power  to  pur- 
chase) and  supply  (t.  e.,  the  quantity  available  in  the  mar- 
ket), is  sharply  criticised.  How  have  a  ratio  between  two 
things  not  of  the  same  denomination?  "What  ratio  can 
there  be  between  a  quantity  and  a  desire,  or  even  a  desire 
combined  with  a  power?"  To  make  supply  and  demand 
comparable,  demand  must  be  defined  as  "quantity  de- 
manded," and  then  the  difficulty  arises  that  the  quantity 
demanded  will  vary  with  the  price,  which  seems  to  present 
a  case  of  circular  reasoning  if  demand  is  to  be  a  determinant 
of  price.  The  solution  which  Mill  develops  for  this  diflH- 
culty  really  gives  ut  jur  modem  conception,  virtually  com- 
plete except  that  Mill  does  not  present  it  in  the  useful 
diagrammatic  form  and  does  not  whisper  the  magic  word, 
"margin."  There  is  a  demand-schedule,  which,  plotted, 
would  give  a  demand-curve.  At  such  and  such  prices,  such 
and  such  quantities  are  demanded,  or  will  be  purchased. 
There  is  a  supply  schedule,  presenting  a  supply  situation 
of  similar  character  (though  not  so  clearly  indicated). 
The  price  reached  is  that  price  which  equalizes  amount  de- 
manded and  amount  supplied.  A  higher  price  will  lead  to 
competition  among  sellers,  forcing  down  the  price,  a  lower 
price  will  lead  to  competition  among  buyers,  forcing  up  the 
price.  The  notion  of  a  ratio  between  supply  and  demand 
is  replaced  by  the  notion  of  an  equation  between  them.  The 
present  writer  wishes  to  remark,  in  this  connection,  that 
Bohm-Bawerk's  elal>orate  analysis,  with  his  "marginal 
pairs,"  etc.,  has  not  advanced  one  step  beyond  this  concep- 
tion of  Mill's,  that  it  is  really  less  satisfactory  than  Mill's 


s* 


THE  VALUE  OF  MONEY 


analysis,  because  of  the  impedimenta  of  pseudo-psychology 
it  has  to  carry,  and  because  of  its  confusion  of  utility  sched- 
ules with  demand  schedules.*  In  our  present-day  exposi- 
tions, as  presentetl  in  the  diagrams,  we  are  accustomed  to 
say  that  price  is  fixed  when  marginal  supply-price  and 
marginal  demand-price  are  equal,  putting  the  stress  on  the 
'^  rdinate,  rather  than  on  the  abscissa,  on  the  identity  of  the 
dollars  paid  or  received,  rather  than  on  the  identity  of  the 
goods  given  or  received.  But  this  is  merely  another  way  of 
stating  the  same  equilibrium  which  Mill  perceived— when 
marginal  demand  and  supply  prices  are  equal,  amount 
supplied  and  amo  '.nt  demanded  will  be  equal,  and  con- 
versely. 

One  point  is  to  be  added,  making  explicit  what  is  implicit 
in  the  modern  theory  of  supply  and  demand.  Supply  and 
demand  doctrine  assumes  money,  and  a  fixed  value  of  money. 
That  there  should  be  a  given  schedule  of  money-prices  for 
varying  quantities  of  a  gootl,  is  jjossible  only  if  there  be  a 
given  value  of  the  money-unit. 

That  the  modern  doctrine  of  supply  and  demand  neces- 
sarily involves  the  assumptions  of  value,  of  money,  and  of 
a  fixed  value  of  money,  may  be  proved  by  the  following 
considerations: 

Supply-situation,  represented  by  the  supply-curve,  and 
demand-situation,  represented  by  the  demand-curve,  are 
conceived  of  as  antithetical  and  indejK'ndent  causal  forces, 
whose  equilibrium  determines  lx)th  "supply  and  demand" 
(in  the  sense  of  (juantities  supplied  and  demanded)  and 
price.  Mill's  doctrine  that  supply  and  demand  deter- 
mine price  gets  out  of  the  circle  that  demand  (amount 
demanded)  is  itself  dependent  on  price,  only  by  mak- 
ing both  demand  in  this  sense  and  price  result':,  rather 
than    causes,   and   by  putting   the  causation   back    into 

'  if.  the  present  writer's  Smidl  Value,  chs.  .j-6,  inclusive. 


SUPPLY  AND  DEMAND 


53 


the  more  complex  factors  which  I  call  "supply-situation" 
and  "demand-situation."  The  two  independent  causes, 
then,  are  summed  up  in  the  supply-curve  and  the  demand- 
curve.  But,  first,  these  curves  are  expres.sed  in  money. 
And  second,  a  change  in  the  value  of  money  would 
affect  both  of  them  proportionately.  But  a  theory  which 
is  concerned  with  supply  and  demand  as  independent 
and  antithetical  must  abstract  from  factors  which  give 
them  a  common  movement,  without  modifying  their  re- 
lation to  each  other.  A  change  in  the  value  of  money 
would  lead  the  supply-cur\e  to  move  to  the  right,  and  the 
demand-curve  to  move  to  the  left,  the  change  in  each  being 
proportionate,  and  the  amount  supplied,  and  amount  de- 
manded, would  remain  unchanged.  Changes  in  the  value 
of  money  must,  therefore,  be  abstracted  from. 

Again,  we  must  precise  the  notion  of  an  increase  in  de- 
mand, or  of  supply.  Increa.^e  in  demand  may  mean  mere 
increase  in  amount  demanded,  consequent  upon  a  lower 
price,  consequent,  i.  e.,  upon  a  lowering  of  the  supply  sched- 
ule. In  this  sense,  increase  in  demand  is  a  passive  fact,  a 
result  rather  than  a  cause.  On  the  other  hand,  if  the  in- 
crease in  demand  is  an  increase  in  the  amount  demanded 
at  the  same  price,  if  it  means  a  change  in  the  demand-situa- 
tion, represented  by  the  movmg  to  the  right  of  the  demand- 
curve,  we  have  a  aiusal  factor  in  increase  in  demand,  a 
factor  which  raises  the  price  and  compels  new  supply  to 
come  into  the  market.  We  may  distinguish  these  two 
meanings  as  increase  in  demand  in  the  active  and  in  the 
I)assive  senses.  Mutatis  mutandis,  we  may  speak  of  in- 
crease of  supply  in  the  active  and  passive  senses.  These 
distinctions  have  been  made  before,  but  it  has  not  been 
clearly  seen  that  these  distinctions,  and  the  connected 
doctrines,  involve  the  assumption  of  a  fixed  value  of 
money.     But  consider:  it   is   the  current  doctrine   that 


54 


THE  VALUE  OF  MONEY 


.    . 


II  : 


{      i- 


increase  in  demand  in  the  active  sense,  the  demanding 
of  a  greater  amount  at  the  same  price,  the  moving  of  the 
demand-curve  to  the  right,  not  only  raises  the  i)rice,  hut 
also  tends  to  increase  the  supply.  But  this  is  true  only  if 
the  cause  of  the  increase  in  demand  is  not  a  cause  which 
simultaneously  works  on  supply,  neutralizing  that  tendency. 
If  the  increase  in  amount  demanded  at  a  given  price  be  due 
to  a  lowered  value  of  money,  then  the  same  lowered  value 
of  money  will  reduce  the  supply  available  at  that  price  pro 
tanU),  and  the  new  equilibrium,  cackris  paribus,  will  be  at  a 
higher  price,  to  be  sure,  but  with  the  same  amount  supplied 
and  demanded.  "Demand"  is  a  term  which  carries  the 
connotation  of  motivating  power  in  economic  theory. 
Through  demand  run  the  forces  which  regulate  production 
and  supply.  The  function  of  increased  demand  is  to  in- 
duce increased  supply.  But  the  value  concept,  and  the 
assumption  of  a  fixed  value  of  money,  are  needed  to  pre- 
serve this  part  of  the  doctrine.  Without  them  we  have  no 
way  of  distinguishing  a  real  increase  in  demand  in  the  active 
sense,  which  does  modify  the  adjustments  in  production, 
and  alter  the  proportions  of  dilTerent  supplies,  from  a  nom- 
inal increase  in  demand  in  the  active  sense,  which  merely 
raises  a  money -price,  without  affecting  supply.' 

'  I  am  here  aljstractins  from  an  im|x)rtant  factor,  namely,  that  not  all 
prices  arc  mTw  twi  equally  by  chanKcs  in  the  value  of  money.  Some  prices 
are  fixed  hy  law  and  custom,  and  st>mc  incomes  are  tied  by  long  time  con- 
tracts. Thus,  it  will  hapi)en,  in  many  <  ascs,  that  supply  and  demand  for  a 
Riven  Kood  will  Ije  unequally  affected  by  a  change  in  the  value  of  money. 
This  means  that  certain  values  are  tird  to  the  value  of  money,  rising  and 
falling  with  it,  so  that  the  amount  of  poicrr  which  some  elements  in  the 
economic  situation  are  ..ole  to  exert  through  sup|)Iy-price-offer  and  demand- 
price-offcr  are  at  the  mercy  of  changes  in  the  value  of  money.  But  this  is 
an  clement  which  is  incalculal)lo,  on  the  basis  of  the  supply  and  demand 
conccj)ts,  and  must  Ik:  abstracted  from  if  we  are  to  make  any  definite  as- 
sertions as  to  the  effect  of  increase  or  decrease  of  demand  in  the  active 
sense  on  sup|)ly  in  the  passive  sinsc,  or  vice  \ers;i.  Unless  we  make  this 
abstraction,  ami  unless  we  assume  a  fixed  value  of  money,  we  might  find 
increase  of  demand  in  the  ailive  sense  (nominal)  leading  sometimes  to  an 


SUPPLY   AND   DEMAND 


55 


Anotlur  approach  will  k-ad  to  the  same  conclusion.  De- 
mand and  sujjply-curv'cs  are  not  to  be  understood  merely 
in  terms  of  brute,  physical  quantities.  They  are  rather 
curves  expressing  economic  sii^iiijkances,  manifesting  psy- 
chological  forces  which  lie  behind  them.  Xo  considerations 
of  mere  physical  quantity  will  explain  why  one  demand- 
curve  should  be  "elastic"  and  another  inelastic, — each 
curve  has  its  own  peculiarities,  which  are  not  mechanical 
in  their  nature.  Demand-curves  express  the  diminishing 
economic  significance  of  goods  as  their  quantity  is  increa.sed. 
How  economic  significance  is  to  be  interpreted  need  not  be 
argued  here.  I  ha\e  elsewhere  undertaken  to  show  that 
the  utility  theory  of  value  does  not  exp'ain  the  economic 
significance  which  demand-curves  express  that  demand- 
curves  are  not  utility  curves.  My  own  theory  is  that  de- 
mand-curves are  to  be  explained  only  in  terms  of  a  social 
psycholog>,  th;it  ilemand-curves  are  social-value  curves. 
But  my  argument  at  this  point  does  not  rest  on  the  partic- 
ular type  of  causal  theory  of  value  one  choo.ses.  It  is 
enough  that  the  demand-curve  be  recognized  as  expressing 
economic  significance,  and  diminishing  'conomic  signifi- 
cance.' But  for  the  demand-curve  to  express  variation  in 
economic  significance  of  a  good,  there  is  need  for  a  unit  in 
which  to  express  that  variation.  That  unit  is  the  economic 
significance  of  the  dollar,  itself  assumed  to  be  invariable — 
as  all  measures  must  be  assumed  to  be  invariable  if  measure- 
ment is  to  mean  anything.  If  the  imit  chosen  vary  in  the 
course  of  a  given  investigation,  the  curve  tells  you  nothing 
at  all. 

increase,  and  s()metimes  to  a  decrease  of  supply  in  the  passive  sense,  or 
nthcr,  l>ein).'  u  comfKinied  by  either  iniriM.sc  or  decrease  of  sujiply  in  the 
|)a.ssive  scnsf.  No  l:iw  would  l)c  iKis,sil)!f.  In  practice,  lK)th  of  these  ah- 
slractiuns  .irc  more  or  less  ((ins<iousiy  assumed. 

'  I  tiiink  that  it  is  a  feeling  that  .Mill  has  left  out  the  psycholonical  factors 
in  supply  and  demand  \vhi(  h  led  Cairnes  to  the  elTort  to  give  dcfiniteness  to 
other  and  saguer  notions  on  the  subject. 


56 


THK   VALUE   OF   MONEY 


I    ■ 


Another  way  of  reaching  the  same  conclusion  is  to  say 
that  an  increase  in  demand  in  the  active  sense  will  lead  to  an 
increase  in  supply  only  if  there  be  no  corresponding  increase 
in  demand  for  the  alternative  employments  of  the  sources 
of  that  supply,  that,  c.  g..  an  increased  demand  for  wheat 
will  lead  to  increased  production  of  wheat  only  if  there  be 
not  a  corresponding  increase  in  the  demands  for  corn  and 
other  crops  which  can  be  raised  on  land  and  with  labor  and 
capital  that  would  otherwise  produce  wheat.  This  is  only 
another  phase  of  the  argument  that  went  before,  that  an 
increase  in  demand  due  to  a  falling  value  of  money  would 
lead  to  a  corresponding  shift  in  the  supply-curve.  It  is  not 
quite  the  same  argument,  however,  because  that  was  an  ar- 
gument concerned  with  short  run  tendencies,  resting  on  the 
assumption  that  the  holders  of  supply  would  immediately 
react  to  a  change  in  the  value  of  money,  whereas  the  argu- 
ment just  presented  rests  on  the  longer  adjustments,  based 
on  the  law  of  costs,  as  worked  out  by  the  Austrians.  This 
point  will  be  made  clearer  in  the  next  chapter. 

Yet  another,  and  perhaps  simpler,  approach  to  the  same 
conclusion  is  by  {xjinting  out  that  an  individual,  deciding 
to  buy,  must  take  account  of  the  prices  of  other  things  in 
his  budget— that  individual  demand-schedules  would  be 
different  if  market  prices  of  other  things  -which  depend  on 
the  value  of  money— were  different. 

The  doctrine  that  sujjply  and  demand  (and  cost  of  pro- 
duction, the  capitalization  theory,  and  other  elements  in 
the  current  price-analysis)  presuppose  a  fixed  value  of 
money,  must  be  sharply  distinguished  from  the  doctrine  of 
Professor  Fisher  (Purchasing  Ponver  of  Money,  ch.  8),  and 
others,  that  a  fixed  general  price  level  is  assumed  by  sup[)Iy 
and  demand,  etc.  I  should  deny  that  a  fixed  general  price 
level  is  assumed.  The  ix)int  rests  in  the  distinction  be- 
tween value  as  absolute  and   value  as  rclalivc.     For  my 


SUPPLY  AND  DEMAND 


57 


theory,  it  is  perfectly  possible  for  the  general  price  level  to 
rise,  with  the  value  of  money  constant,  because  of  a  rise  in 
the  values  of  goods.  In  a  later  chapter,  on  "The  Passive- 
ness  of  Prices,"  I  shall  examine  the  doctrine  of  Professor 
Fisher  more  closely,  and  set  these  two  views  in  clearer  con- 
trast. For  the  present,  it  is  enough  to  point  out  one  vital 
difference  between  a  rise  in  prices  due  to  a  fall  in  the  value 
of  money  and  a  rise  in  prices  due  to  a  rise  in  the  values  of 
goods,  with  the  absolute  value  of  money  unchanged:  in  the 
latter  case,  there  is  an  increase  in  the  psychological  stimulus 
to  industry,  an  increase  in  economic  power  in  motivation, 
which  energizes  and  increases  production.  In  the  latter 
case,  especially  when  the  fall  in  the  value  of  money  is  rapid, 
and  the  rise  in  prices  is  clearly  diue  to  that  cause  (as  in  the 
case  of  Confederate  paper,  or  the  French  Assignats),  we 
find  a  reverse  effect  on  industry.  Intermediate  cases, 
where  money  is  falling  in  value,  but  where  goods  are  also 
rising,  give  us  intermediate  results. 

In  what  follows,  I  shall  from  time  to  time  refer  to  this 
distinction.  In  my  own  exposition,  I  shall  always  use 
"value  of  money"  in  the  absolute  sense,  as  distinguished 
from  the  mere  "reciprocal  of  the  price  level," — a  practice 
which  I  have  sought  to  justify  in  the  chapter  on  "Value," 
and  in  other  places  there  referred  to.' 

The  modem  theory  of  supply  and  demand,  then,  assumes 
money,  and  a  fixed  value  of  money.  It  is,  therefore,  ob- 
viously unfitted  as  an  instrument  to  solve  the  problem  of 
the  value  of  money.  If  supply  and  demand  concepts  are 
to  be  applied  to  this  problem,  they  must  be  of  a  different 
sort    This  was  pointed  out  by  Caimes  -  who  criticised 

'  Cf.  Sociid  Value,  ch.  a;  "The  Concept  of  Value  Further  Considered," 
Quart.  Jour,  of  Economics,  Aur.  igis.  Tor  the  doctrine  that  supply  and 
demand,  and  other  elements  of  current  price  theory,  assume  a  fixed  absolute 
value  of  money,  see  Social  Value,  p.  i(j6,  n.,  and  ch.  17. 

^  Uading  Priiiciplfs,  ch.  on  "Supply  and  Dcmantl." 


58 


THE  VALUE  OF  MONEY 


lli 


Mill's  f«)miulati<>n,  and  j)()inti(I  out  that  Mill  departed 
from  it  in  thrir  iaj)ilal  dot  tritiis:  in  the  theory  of  the  value 
of  money,  in  the  theory  of  wa^es,  and  in  the  theory  of  in- 
ternational values.  By  the  demand  for  money,  Mill  means, 
not  the  amount  of  money  demanded,  hut  the  quantity  of 
^oods  olTered  aj,'ainst  money  -  a  very  different  conception. 
(Mill,  /'nmif>l(s.  Bk.  III.  ch.  viii,  par.  2.)  In  what  sense 
a  (juantity  of  j^oods  can  ecjual  a  (juantity  of  money,  or  in 
what  sense  there  can  be  a  ratio  between  goods  and  money, 
(to  recur  to  Mill's  former  problem  as  to  the  ratio  between 
things  not  of  the  same  denomination)  Mill  does  not  make 
clear,  nor  is  it  defensible  to  sjK'ak  of  either  a  ratio  or  an 
e(|uati()n  on  the  basis  of  Mill's  .system,  since  Mill  had  no 
absolute  value  concept.  Cairnes  seeks  to  reconstruct  the 
notion  of  supply  and  demand,  in  such  fashion  as  to  make  it 
possible  to  apply  it  universally,  and  takes  up  the  ciuestion 
of  the  comparability  of  sujiply  conceived  as  a  quantity  of 
goods,  and  demand,  conceived,  not  as  a  quantity  of  goods, 
but  as  desire  combined  with  the  ability  to  pay.  He  con- 
cludes that  in  lx)th  supply  and  demand  there  is  a  physi- 
cal, as  well  as  a  mental,  element.  Demand  he  defines  as 
the  desire  for  a  commodity  backed  by  general  purchasing 
power;  supply  as  the  desire  for  general  purchasing  power, 
backed  by  the  offer  of  a  commodity.  Thus  he  thinks  he 
has  made  the  two  of  the  .same  denomination,  so  that  com- 
parison may  Ix'  instituted  between  them,  and  the  ideas  of 
ecjuation.  ratio,  and  proportion  made  legitimate.  By 
"general  purchasing  {X)wer,"  C'airnes  seems  to  mean  money 
and  the  representatives  of  money.  It  is  not  an  abstract 
power,  since  it  is  the  "physical"  element  in  demand,  com- 
parable with,  and  of  the  same  denomination  with,  the  physi- 
cal element  in  supj)ly,  a  commodity.  C'airnes'  solution  of 
Mill's  difVicult>  seems  to  me  to  be  merely  verbal,  however. 
First,  in  what  way  is  the  desire  for  general  purchasing  power 


SITPPLY   AND  DRMAND 


59 


in  the  mind  of  one  man  comparable  with  the  desire  for  a 
commodity  in  the  mind  of  another  man?  I  pass  over  the 
supposed  difHculty  that  knowledge  of  other  men's  emo- 
tions is  impossible,'  and  emphasize  simply  the  point  that 
price  offer,  either  by  demander  or  supplier,  is  no  test  of  the 
intensity  of  desire  where  there  are  inequalities  in  the  dis- 
tribution of  wealth.  But  second:  in  what  sense  is  general 
purchasing  power,  money  and  money-funds,  of  the  same 
dcnominatitm  as  a  commodity?  Cairncs  emphasizes  the 
physical  character  of  both.  But  surely  they  are  not  com- 
parable on  the  basis  of  any  physical  attributes— weight, 
bulk,  etc.  Certainly  if  we  look  at  the  concept  of  demand 
here  given,  the  physical  asfjcct  is  simply  irrelevant —gold 
money  goes  by  weight,  but  what  of  paper  money  and  credit 
instruments?  And  in  what  sense  is  even  gold  money  phys- 
ically of  the  same  denomination  with,  say,  wheat,  or  hay 
or  base-ball  tickets?  Not  physical  quantities,  but  economic 
quantities,  are  relevant  here;  not  weight  or  bulk,  but 
value.  By  means  of  a  concept  of  value,  as  the  homogeneous 
quality  of  wealth,  present  in  each  piece  of  wealth  in  definite, 
quantitative  degree,  could  Cairnes  bring  about  compara- 
bility between  the  "physical"  elements  in  supply  and  de- 
mand. But  not  otherwise.  Only  significances,  values,  are 
relevant  here.    Supply  and  demand  presuppose  value. 

It  will  be  interesting  to  consider  the  effort  to  solve  the 
problem  of  the  value  of  money  by  means  of  supply  and 
demand  on  the  lines  employed  by  Mill,  where  demand  for 
money  is  defined  as  quantity  of  goods  to  be  exchanged,  and 
supply  of  money  as  quantity  of  money  times  rapidity  of  cir- 
culation, and  where  physical  quantities  are  treated  as  the 
relevant  factor,  no  value  concept  of  the  sort  here  contended 
for  being  presupposed.  This  is,  essentially.  Mill's  method. 
There  is,  in  this  conception,  first  the  difficulty  that  "quan- 

'  Cf.  Social  Value,  pp.  29-30,  and  64-71. 


6o 


THE  VALUE  OK   MONKY 


8i 


tity  of  goods  to  be  i-xrhanjjecl "  is  not  a  true  quantity  at  all, 
but  is  a  mere  collection  of  things  of  different  denominations, 
dozens  of  eggs,  |x)unds  of  butter,  gallons  of  milk,  etc.,  in- 
capable of  iK'ing  funded  into  a  quantity.*  There  is.  sec- 
ond, the  difliculty  that  increasing  the  amount  of  any  one 
of  the  items  in  this  heterogeneous  com|x>site  need  not  in- 
crease the  "demand"  for  money,  in  the  sense  that  it  in- 
creases the  "pull"  on  money,  or  tends  to  increase  the  supply 
of  money.  Vet,  under  the  general  dcKtrine  of  supply  and 
demand,  an  increase  in  demand  should  Ix;  a  stimulus  to 
increase  in  supply.  Indeed,  it  is  easy  to  construct  a  case 
where  an  increa.se  in  the  quantity  of  one  of  the  items  in  this 
com|X)site.  the  others  remaining  unchanged,  would  actually 
tend  to  repel  mone)-.  to  reduce  the  supply  of  money.  Sup- 
pose that  one  item  in  America's  stock  of  g(KMls,  say  cotton, 
is  much  increased  in  quantity,  and  suppose  that  cotton  has 
a  highly  inelastic  demand-curve,  so  that  the  increased  quan 
tity  sells  for  less  money  than  the  original  (juantity.-  Sup- 
pose, ttx),  that  cotton  is  our  i^^hief  article  of  export,  and  that 
the  bulk  of  our  cotton  is  exixirted.  Would  not  the  "bal- 
ance of  trade"  tend  to  turn  against  us,  so  that  gold  would 
tend  to  leave  the  country,  and  the  supply  of  money  be  re- 
duced? There  is  nothing  in  the  situation  as.sumed  to  raise 
the  prices  of  other  gcKxIs,'  so  that  they  could  exert  a  coun- 


'  (/.  the  (iiMUSHion,  iiifrii,  <»f  "T"  in  thi-  "tiiuation  of  cxrhan>{f." 
*Cottim  U  ch(>>.cn  for  this  illustration  lH-iaus«:  it  h;is  actuully  ha|>|ienr<l, 
more  than  onie,  that  a  lanjc  ip n  has  sold  for  a  smaller  a^KreKate  |»ri»c 
than  a  smaller  one.  Thus,  not  to  take  an  extreme  illustration,  the  <  rop  of 
l()lo-ii  was  ii,5(>S,^^4  hales.  That  of  lyti-i.'  was  I5,55,<.07,i  hales.  The 
average  priie  of  s|Mit  eotton  at  New  York  fn>m  (kt.  kjio  to  June,  i<)ii, 
inclusive,  was  almost  i  s<  •  |H't  Ih.;  the  averane  price  of  s|)i>l  nitton  in  .New 
N'ork  (UirinK  the  sinie  months  in  kjii  i.'  was  not  cpiile  lo  rents  |Kr  II). 
On  this  fwsis,  the  eleven  million  ixld  halesnf  iiiio  ii  sold  for  substantially 
more  than  the  lifteen  million  ihIiI  hales  of  km  i    i  ' 

'  \or  is  there  anylhinK  in  the  hy|>olhe>is  to  reduce  the  numlK-r  of  times 
any  (»o<mI  nee»ls  to  Ih'  ex<hanKe«l  against  money.  Rather  there  would  Ik: 
an  increase  of  exchanKinK.  as  sjiecutation   took  place  to  biinK  about  the 


SUI'IM.Y  AND  DEMAND 


6t 


teructing  "pull"  on  monoy.  Kuroix»ins,  to  be  sure,  hav- 
ing less  to  pay  for  cotton,  could  demand  more  of  other 
things,  and  Americans  paying  less  for  cot  ion  could  demand 
more  of  other  things.  But,  on  the  other  hand,  American 
|)nMlucers  of  ctitton,  receiving  less  for  their  cotton — re- 
ceiving precisely  as  much  less  as  the  others  had  more — 
couhl  then  demand  less  of  other  things,  exactly  as  much 
less  as  the  others  are  able  to  demand  more.  The  original 
tendency  for  gold  to  leave  the  country,  and  the  tendency 
for  gold  to  leave  the  money-form  and  Ik*  usctJ  in  the  arts, 
would  remain  unneutralized.  An  "increase  of  demand 
for  money,"  in  Mill's  sense,  would  in  this  case  present  the 
remarkable  phenomenon  of  driving  money  away.  Physical 
quantities  are  irrelevant.  Psychological  significances  are 
what  count. 

It  is  interesting  to  note,  in  this  connection,  that  some 
striking  contradictions  in  (juantity  theory  reasoning  on  any 
formulation,  whether  connecte<l  with  the  notions  of  supply 
and  demand  or  not,  are  involved  in  this  h>pothesis.  The 
illustration  above  gives  i  case  where  a  lowered  price  level 
leads  money  to  flow  away  from  your  country.  But,  on  the 
quantity  theory  explanation  of  foreign  exchange,  it  is  rising 
price  levels  which  drive  gold  away,  and  /ailing  price  levels 
which  attract  gold! ' 

Mill's  effort  to  apply  the  notion  of  demand  and  supply  to 
the  value  of  money  is,  then,  (i)  not  an  application  of  his 
formal  doctrine  of  supply  and  demand,  and  (2),  is  a  failure, 
leads  to  results  contradictory  to  the  general  law  of  supply 
and  demand,  as  .soon  as  we  take  account  of  the  jwculiaritics 
of  individual  comminlities.  and  cease  to  look  at  commotJitics 
in  one  huge  lump.     Psychological  forces,  rather  than  physi- 

mi'clul  riMiljustmi-nts.  I-'or  tlu'  prt'stiil,  I  al>strart  fn>m  this.  Cf.  infra, 
the  ihaptcr  on  "N'olnmc  of  .Money  and  N'nliimc  of  Tratlc." 

'  I  ishull  rt-cui  to  this  jioint  in  the  chapter  on  "The  Quantity  Theory  and 
International  Gold  Movements." 


MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No    2) 


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62 


THE  VALUE  OF  MONEY 


cal  quantities,  are  what  count.  Whether  or  not  the  supply 
and  demand  notion  oi  Cairnes,  reinterpreted  by  putting  a 
quantitative  value  concept  into  it,  could  serve  as  a  means  of 
approach  to  the  value  of  money,  I  shall  not  here  argue.  No 
one  so  far  as  I  know  has  attempted  to  do  the  thing  that 
way,  and  my  own  theory  is  best  developed  by  another 
method.  It  is  interesting  to  note,  however,  another  some- 
what different  effort  to  apply  the  supply  and  demand  for- 
mula. General  Walker  does  so,  including  among  the  fac- 
tors determining  the  demand  for  money,  not  only  the 
quantity  of  goods  to  be  exchanged,  but  also  the  prices  '  pre- 
vailing. Since  by  value  of  money  Walker  means  merely 
the  reciprocal  of  the  price-level,  this  is  the  clearest  possible 
case  of  a  vicious  circle.  It  would  be  a  circle  even  if  he  were 
trying  to  expla'n  the  absolute  value  of  money,  as  distin- 
guished from  the  reciprocal  of  the  price-level,  since  the 
former  is  one  of  the  determinants  of  the  latter.  Value  of 
money  and  values  of  goods  determine  prices;  prices  and 
quantity  of  goods  determine  demand  for  money;  demand 
and  supply  of  money  determine  value  of  money,— a  hope- 
less circle. 

I  know  no  sense  in  which  the  terms,  demand  and  supply 
of  money,  can  have  relevance  to  the  problem  of  the  value  of 
money.  There  is  one  sense  in  which  the  terms  can  be  used 
which  fits  in  with  the  modern  supply  and  demand-curves, 
and  that  is  the  sense  in  which  they  are  used  in  the  money 
market.  Demand  for  money  comes  from  borrowers ;  supply 
of  money  from  lenders.  The  price  paid  is  a  money-price, 
the  curves  express  the  short  time  money-rates,  the  rental  of 
money,  in  terms  of  money,  for  stated  periods  of  time.  There 
is  a  relation,  later  to  be  investigated,  between  the  rental  of 
money,  the  money-rate,  and  the  value  of  money,  but  the 
two  are  in  no  sense  the  same.    It  should  be  noted,  too,  that 

•  Quart.  Jour,  of  Economics,  1894-95,  p.  372- 


SUPPLY  AND  DEMAND 


63 


we  are  here  concerned  with  "money-funds"  rather  than 
with  money  in  the  strict  sense,— distinctions  and  relations 
in  this  connection  properly  belong  at  another  stage  of  our 
inquiry.  Whenever  the  terms,  demand  and  supply  of 
money,  appear  in  the  following  pages,  they  will  be  used  in 
the  sense  developed  in  this  paragraph. 

Demand  and  supply  are  superficial  formula.  They 
cannot  touch  a  problem  so  fundamental  as  that  of  the  value 
of  money. 


CHAPTER  III 


COST  OF  PRODUCTION  AND  THE  VALUE  OF 

MONEY 

When  the  cost  theory  was  a  labor  theory,  as  with  Ri- 
carclo,  the  expression,  cost  of  nrotluction  of  money,  could 
have  a  definite  meaning.  It  meant  the  labor-cost  of  pro- 
duciiig  the  money  metal.  Even  in  this  form,  it  is  recog- 
nized that  cost  of  production  has  a  looser  connection  with 
value  in  the  case  of  money  than  in  the  case  of  most  com- 
modities, because  the  supply  of  money  metal  is  large  and 
durable,  and  the  annual  production  affects  it  slowly.  But 
cost  of  production  theories,  in  the  form  of  labor  theories,  or 
labor-abstinence-risk  theories,  have  little  standing  in  modern 
economic  theory.  Ricardo  himself  saw  the  break-down  of 
the  pure  labor  theory;  and  Cairnes,  Ultimus  Romanorum, 
so  limited  and  modified  the  "real  costs"  doctrine  as  to 
leave  little  validity  in  it,  even  on  his  own  showing.  The 
prevalent  doctrine  of  cost  of  production  runs  In  terms  of 
"money-costs" — and  hence  is  of  no  use  when  the  problem 
of  the  value  of  money  itself  is  to  be  solved. 

A  brief  historical  sketch  of  the  cost  theory  will  be  help- 
ful. Costs  are  sometimes  conceived  as  a  cause  of  value, 
and  sometimes  as  a  measure  of  value.  Often  these  two 
aspects  are  mixed,  and  writers  shift  from  one  notion  to  the 
other.  This  is  particularly  true  of  the  labor  theory.  In 
Adam  Smith  the  contentiun  sometimes  is  that  labor  is  un- 
varying in  value,  hence  an  admirable  measure  of  values, 
and  an  excellent  standard  of  long-time  deferred  payments. 
Smith  compares  wheat  and  silver  from  the  standpoint  of 
the  constancy  of  their  relation  to  labor,  and  concludes  that 

64 


u__ 


COST   OF   PRODUCTION 


wheat  is  the  better  standard  in  the  long  run,  because  it  re- 
mains more  nearly  fixed  with  reference  to  labor  than  does 
silver.  Sometimes  Smith  thinks  of  labor  as  a  cause  of 
value,  and  thinks  of  the  labor  that  enters  into  the  produc- 
tion of  a  good  as  the  significant  thing.  At  other  times,  the 
labor  that  goods  will  command  or  purchase  is  the  .signifi- 
cant thing — and  here  one  is  not  clear  whether  he  thinks  of 
labor  as  a  cause  or  as  a  measure.  Whether  labor  is  to  be 
funded  as  labor-pain,  or  as  labor-time.  Smith  does  not  state. 
Sometimes  labor  seems  to  be  considered  as  homogeneous 
in  its  efficiency.  At  other  times,  he  makes  comparison  be- 
tween different  kinds  of  labor  as  to  their  efficiency,  and  com- 
pares the  efficiency  of  labor  in  different  occupations.  One 
can  find  nearly  anything  one  pleases  in  Adam  Smith  on 
these  points.  At  times  he  speaks  of  "labor  and  expense," 
rather  than  labor  alone,  as  governing  prices. 

Labor-cost  to  the  laborer  would  take  the  form  of  labor- 
pain  or  labor-time.  To  the  employer,  it  would  take  the 
form  of  outlay  in  wages.  Adam  Smith  never  makes  any 
definite  statement  of  point  of  view  here,  and  shifts  back 
and  forth  from  one  to  the  other.  He  recognizes  variations 
in  labor-pain,  in  danger,  etc.,  in  different  kinds  of  labor 
when  discussing  wages. 

Ricardo  elaborated  the  labor  theory  of  value,  and  tried 
to  think  it  through.  He  was  too  keen  a  logician  to  shift 
view-points  with  Smith's  facility,  and  he  tried  to  make  a 
completed  system.'  There  is  some  shifting  from  the  theory 
of  labor  as  a  cause  of  value  to  labor  as  a  measure  of  value, 
as  in  the  following  passage:  "If  the  state  charges  a  seign- 
iorage for  coinage,  the  coined  piece  of  money  will  generally 
exceed  the  value  of  the  uncoined  piece  of  metal  by  the 
whole  seigniorage  charged,  because  it  will  require  a  greater 

'C/.  Davenport,  Value  aid  DistribiUioit,  and  Whilukcr,  Labor  Theory 
of  Value. 


66 


THE   VALUE   OF   MOM-.Y 


quantity  of  labour,  or,  which  is  the  same  thing,  the  value 
of  the  produce  of  a  greater  quantity  of  labour,  to  procure 
it."     {Works,  McCulloch  ed.,  213.)    In  general,  however, 
Ricardo  developed  a  causal  theory  of  value,  quantity  of 
labor  being  the  basis  of  the  absolute  values  of  goods,  their 
relative  values  depending  on  the  relative  amounts  of  labor 
involved  in  the  production  of  each.    I  shall  not  go  into  the 
matter  fully,  but  shall  call  attention  to  the  rock  on  which 
the  system  split,  as  Ricardo  himself  admits.    A  greater  or 
less  proportion  of  capital  works  with  labor  in  producing 
different  things,  and  the  value  of  product,  in  that  case, 
varies  not  merely  with  the  labor,  but  also  with  the  amount 
of  capital,  and  the  length  of  time  the  capital  is  employed. 
How  say,  then,  that  labor  alone  governs  value?    How  re- 
duce labor-cost  and  capital-cost  to  homogeneous  terms? 
James  I^Iill  tried  to  do  it  for  him  by  making  capital  merely 
stored  up  or  petrified  labor,  which  gives  up  its  value  again 
in  production.    But  this  doesn't  meet  the  difficulty,  be- 
cause there  is  a  surplus  value,  over  and  above  that  ex- 
plained by  all  the  labor,  including  the  labor  which  pro- 
duced the  machine,  and  the  labor  which  produced  the  raw 
materials  which  entered  into  the  machine,  etc.    The  case 
of  wine  is  a  particularly  obstinate  case.    Wine  increases 
in  value  merely  with  the  passage  of  time,  at  a  rate  which 
corresponds  to  the  profii  on  capital.    Ricardo  finally,  in 
correspondence  with  McCulloch,  definitely  abandons  the 
case,  stating  that  there  are  many  exceptions  to  the  propor- 
tionality   between    exchange    value    and    labor-cost.     "I 
sometimes  think  that  if  I  were  to  write  the  chapter  on  value 
again  which  is  in  my  book,  I  should  acknowledge  that  the 
relative  value  of  commodities  was  regulated  by  two  causes 
instead  of  one,  namely,  by  the  relative  quantity  of  labor 
necessary  to  produce  the  commodities  in  question,  and  by 
the  rate  of  profit  for  the  time  that  the  capital  remained 


COST  OF  PRODUCTION 


67 


dormant."  (Da.\'enport,  Value  and  Distribution,  p.  41.)  But 
this  is  a  "dualistic"  rather  than  a  "monistic"  explanation 
— one  element  is  a  money-expense,  or  at  all  events  a  pecu- 
niary item,  while  the  other  is  a  "real  cost"  item.  The 
two  are  incommensurate  and  incommensurable. 

Senior  seeks  to  supply  the  unifying  principle.  "Absti- 
nence" and  labor  have  pain  as  a  common  element,  and  so 
are  commensurable.  Costs,  reduced  to  labor  and  absti- 
nence, become  homogeneous  again.  Monism  is  restored. 
Caimes  completes  the  doctrine  by  adding  risk  to  the  real 
cost  elements:  a  triune  cost  concept,  sacrifice  being  the 
generic  fact  in  the  three  manifestations. 

With  John  Stuart  Mill,  in  general,  we  have  an  entrepre- 
neur view-point.  Money-expenses  of  production,  entrepre- 
neur outlay,  plus  wages  of  management,  or  including  wages 
of  management,  are  the  factors  with  which  Mill  reckons. 
He  is  no  longer  concerned  with  psychological  ultimates,  or 
real  costs.  Caimes  criticised  Mill  sharply  for  this.  No 
distinction  is  more  fundamental  he  holds,  than  that  be- 
tween costs  or  sacrifice  on  the  one  hand,  and  rewards  on  the 
other.  Labor,  abstinence  and  risk  are  sacrifices;  wages, 
interest,  profits  are  rewards.  None  the  less,  in  cost  doc- 
trine, as  in  supply  and  demand  doctrine,  it  is  Mill's  view 
which  has  prevailed.  Cost  as  conceived  by  Mill  is  a  super- 
ficial, pecuniary  notion.  It  tells  little  as  to  ultimate  causa- 
tion. But  it  is  virtually  only  as  a  pecimiary  doctrine, 
costs  from  the  entrepreneur  view-point,  that  the  cost  doc- 
trine is  met  in  modern  theory. 

Why  is  this?  Well,  first,  the  real-cost  doctrine  simply 
does  not  square  with  the  facts.  The  hardest  labor  does  not 
produce  the  most  valuable  goods.  Value  in  fact  does  not 
vary  either  with  labor-pain  or  labor-time.  In  fact,  what- 
ever the  explanation,  it  would  seem  to  be  truer  that  the  re- 
lation is  an  inverse  relation.    Nor  does  the  abstinence  that 


,  i 


:•  ■ 


1  ?■  , 


; 


I, 


68 


THE  VALUE  OF  MONEY 


pinches  hardest  produce  the  largest  amount  of  capital. 
And  while   there  is  some  correlation  between  risks  and 
profits,  the  correlation  is  at  best  low  and  is  not  a  correla- 
tion l)etwecn  psychological   sacrifice  and  profits.     Even 
"marginal  abstinence"  for  a  Rothschild  or  a  Rockefeller 
causes  no  pain.    It  is  absurd  to  seek  to  find  a  common 
element  in  the  "abstinence"  of  a  rich  man  and  the  pain  of 
a  poor  and  aged  laborer.     I  pass  over  the  supposed  diffi- 
culty that  abstinence  is,  in  general,  suffered  by  one  set  of 
minds,  and  labor-pain  by  a  different  set  of  minds,  and 
hence,  since  men  cannot  compare  their  own  emotions  with 
the  emotions  of  other  men,  there  is  no  comparability .    This 
subjectivistic  psychology  would,  of  course,  make  it  equally 
impossible  to  fund  labor-pains  of  different  laborers,  or  to 
get  any  common  denominator  at  all.'    It  is  enough  to  point 
out  that  differences  between  rich  and  poor,  between  suc- 
cessful and  unsuccessful,  between  efficient  and  inefficient, 
(apart  from  acquired  differences  which  may  be  smoothed 
out  by  the  "stored  up  labor-of-training"  principle)  make 
labor-pain,  and  marginal  labor-pain,  vary  greatly  fro!n 
value,  and  make  labor-pain,   abstinence  and  risk  quite 
incommensurable,  and  quite  without  fixed  relation  to  value. 
Cairnes  saw  this  in  part,  and  developed  his  doctrine  of  non- 
competing  groups  to  deal  with  it.    Labor-pain  and  value 
vary  together  only  when  wc  are  comparing  goods  producer! 
by  laborers  within  a  competing  group.    Laborers  in  one 
group  do  not  compete  with  laborers  in  another  group. 
There  is  perfect  competition  in  the  capital  market,  how- 
ever, and  so  capital  costs  ("abstinence")   are  perfectly 
correlated  with  value,  to  the  extent  that  capital  enters. 
Cairnes  seems  to  think  that  the  whole  difficulty  with  his 
real  cost  doctrine  comes  from  the  failure  of  competition. 
In  fact,  however,  it  comes  also  from  the  inequalities  in 

'  Cf.  Social  Value,  pp.  29-30;  74-71- 


COST  OF   PRODUCTFOX 


69 


wealth.  And  even  in  Iiis  highly  competitive  capital  market 
it  is  equally  true  that  abstinence,  or  even  marginal  absti- 
nence (a  term  which  Cairnes  does  not  use)  has  no  constant 
relation  to  amount  of  capital  accumulated,  value  produced, 
or  interest  received.  The  cost  theory  breaks  down  at  every 
point  when  it  runs  in  labor-abstinencc-risk  terms.  So  gen- 
erally has  this  been  recognized,  that  the  cost  theory  has 
generally  given  way  to  the  utility  theory,  and  cost  doctrine 
when  it  appears  in  modern  economics  is  either  the  very  su- 
perficial money-outlay  notion  of  Mill,  or  else  the  Austrian 
cost  doctrine,  later  to  be  discussed,  which  is  still  a  pecun- 
iary concept.  I  have  elsewhere  undertaken  to  show  (Social 
Value,  chs.  3-7,  and  the  ch.  on  "Marginal  Utility,"  infra) 
that  these  defects  of  the  "real-cost"  theory,  are  just  as 
much  in  evidence  in  the  utility  theory.  The  failure  of  the 
real  cost  theory  of  value  is  by  no  means  a  vindication  of 
the  utility  theory.  Both  have  the  same  vice — the  effort 
to  combine  into  a  homogeneous  sum  a  lot  of  individual 
psychological  magnitudes  measured  in  money,  when  the 
money-measure  has  a  different  psychological  significance 
for  each  individual,  and  so  comparison  and  addition  are  im- 
possible. But  in  any  case,  the  real  cost  doctrine  of  the 
Classical  School  has  failed,  and  so  cannot  serve  as  the  basis 
ol  the  theory  of  the  value  of  money. 

Obviously  the  money-outlay  cost  theory  of  Mill  cannot 
explain  the  value  of  money  itself.  The  marginal  cost  of 
producing  twenty-three  and  twenty-two  hundredths  grains 
of  gold  will  always  be  a  flollar,  however  the  dollar  may 
vary  in  value.  Indeed,  in  general,  the  assumption  of 
a  constant  value  of  the  money-unit  is  implied  in  the  mone- 
tary cost  concept.  Cost  curves  are  supply-curves,  and  the 
reasoning  already  given  as  to  the  need  for  assuming  con- 
stant value  for  money  in  the  supply  and  demand  concept 
will  apply  here.    Costs  function  in  value-determination  only 


\i 


\  i 


^tM. 


70 


THE  VALUE  OF  MONEY 


by  checking  supply.  Rising  costs  tend  to  mean  a  lessened 
supply.  But  if  the  cost -curve  is  rising  luransc  of  a  fall  in 
the  value  of  money,  then  the  demand-curve  will  be  rising 
also,  and  production  will  not  be  checked.  The  general 
law  as  to  the  relation  of  cost  to  demand  and  supply  assumes 
a  fi.xed  value  of  the  unit  of  cost,  the  dollar. 

To  the  Austrian  economists  we  owe  a  rational  theory  of 
costs  which  gives  the  money-outlay  concept  more  than  a 
merely  empirical  basis.  First,  they  see  in  costs  not  causes, 
but  results.  Value  causation  comes  ultimately,  not  from 
the  side  of  supply,  but  from  the  side  of  demand.  I  shall 
not  now  undertake  a  criticism  of  their  explanation  of  de- 
mand. I  have  elsewhere  criticised  their  confusion  of  de- 
mand-curves and  utility-curves,  and  pointed  out  that 
marginal  utility  gives  no  explanation  of  demand.  I  shall 
recur  to  the  utility  theory  of  value  at  a  later  point.  For 
the  present,  it  is  enough  to  point  out  that  the  Austrian 
theory  of  costs  is  independent  of  their  utility  vagaries,  and 
rests  best  on  the  notion  of  supply  and  demand,  as  expressed 
in  the  modern  curves,  with  the  assumption  of  a  fixed 
value  of  the  money-unit.  Costs  consists  of  entrepreneur 
money  outlay  of  various  kinds,  chiefly  wages,  interest,  and 
rent.  Rent  is,  for  the  Austrians,  as  much  a  cost  as  any 
other  item  of  entrepreneur  outlay.  But  these  items  of 
cost  are  not  ultimate  data.  They  are  rather  reflections  of 
the  positive  values  of  the  products.  Value  runs  from  fm- 
Ished  product  to  agents  of  production,  labor,  and  instru- 
mental goods,  and  land.  Avoiding  needless  complications 
from  a  discussion  of  interest  as  a  factor  in  cost — a  doctrine 
on  which  the  Austrians,  say  Wieser  and  Bohm-Bawerk,  are 
not  agreed, — it  is  enough  to  point  out  that  high  wages  or 
high  rents,  which  limit  production  in  any  given  industry  or 
establishment,  are  high  because  the  land  and  labor  in  ques- 
tion have  alternative  uses,  because  other  industries,  or  other 


COST   OF    PRODUCTIOV 


71 


competitors  in  the  same  industry,  bid  for  them.  Cost- 
curves,  then,  are  reflections  of  demand-curves.  The  rost- 
curve  of  wheat,  c.  1;.,  is  what  it  is  because  of  the  demand- 
curve  for  corn,  for  cattle,  and  for  every  other  commodity 
that  could  be  produced  with  the  same  labor  and  land.  Cost 
doctrine  thus  becomes  part  of  the  general  tloctrinc  oi  supply 
and  demand,  and  runs  in  pecuniary  terms,  assuming  money, 
and  a  fixed  value  of  money,  and  hence  i  incapable  of  serv- 
ing as  a  theory  of  the  value  of  money  itself. 

That  some  vaguer  form  of  cost  doctrine,  where  the  unit 
of  cost  is,  not  money,  but  some  composite  commodity  of 
things  used  in  the  production  of  the  standard  money  metal, 
or  a  unit  of  abstract  value,  might  be  worked  out,  is  doubt- 
less true.  Gold  production,  like  other  industr}',  is  part  of  the 
general  economic  scheme,  and  there  is  some  sort  of  equilib- 
rium reached  which  draws  labor  and  capital  now  away 
from,  and  now  back  to,  the  gold  mine.  To  bring  this 
equilibrium  into  the  general  scheme  of  the  modern  theory 
of  costs,  however,  in  terms  precise  enough  to  make  a  satis- 
factory theory  of  the  value  of  money,  is  a  thing  which  has 
not  so  far  been  done,  and  I  do  not  have  high  hopes  of  its 
early  accomplishment.  In  any  case,  such  a  theory  must 
rest  upon  a  positive  theory  of  value.  Cost  doctrine  is 
negative,  and  can  never  be  fundamental.* 

'  I  incline  to  the  view  that  the  explanation  of  costs  by  foregone  positive 
values  needs  supplementing  by  a  recoj^nilion  of  t!ie  rdlc  of  iiegative  social 
values,  and  that  thus  interp/rcted,  "  real  costs '"  have  a  minor  part  to  play. 
But  I  have  not  thought  the  matter  through  satisfactorily,  and  shall  find  no 
occasion  to  use  the  doctrine  in  the  present  volume. 


CHAPTER  IV 

THE  CAPITALIZATION  THEORY  AND  THE  VALUE 

OF  MONEY 


Money  is  capital.  A  dollar  is  a  capital-gocxl.  Money  is, 
moreover,  a  durable  form  of  capital,  which  gives  forth  its 
services  bit  by  bit,  and  indeed,  in  a  community  where  the 
state  bears  the  burden  of  wear  and  tear,  never  ceases  to 
give  forth  those  services.  In  any  case,  from  the  stand- 
point of  a  given  individual,  so  long  as  there  is  a  limit  of 
tolerance  prescribed  for  legal  tender,  it  is  a  matter  of  acci- 
dent if  he  ever  incurs  a  loss  from  the  wastage  of  the  capi  1 
instrument,  money,  through  wear  and  tear.  Moreover, 
the  fact  that  money  is  "fungible,"  and  that  its  use  is  to  be 
found  in  a  process  which  commonly  returns  to  the  owner, 
not  the  same  coin,  but  a  different  coin,  we  may,  in  general, 
abstract  from  the  wear  and  tear  of  the  dollar,  and  look  upon 
the  dollar  as  a  capital  instrument  which  promises  its  owner, 
if  he  chooses  to  use  it  as  capital,  a  perpetual  annuity.  The 
nature  of  this  money  service  will  be  more  fully  described 
later.  For  the  present  it  is  sufficient  to  say  that  exchange 
is  a  productive  process,  that  exchange  creates  values,  in  as 
true  a  sense  as  manufacturing  does,  and  that  money  facil- 
itates exchange  in  as  true  a  sense  as  coal  facilitates  manu- 
facturing. There  is,  at  any  given  time,  a  demand-curve 
for  this  money  service,  manifesting  itself  in  the  money 
market,  a  demand  for  the  short  time  use  of  money  as  a  tool 
of  exchange,  and  the  "prices"  which  come  out  of  the  inter- 
action of  demand  and  supply  in  the  money  market  are  the 
short   time   "money  rates"   including   the  "call  rates." 

7a 


THE   CAPITAI' 


UN   THEORY 


73 


These  are  properly  to  be  conceived,  not  as  pure  interest  on 
abstract  iuj)ital,  but  as  rents  '  which  are  to  be  attributed 
to  money  as  a  concrete  tool. 

Xow,  in  general,  when  such  rents  appear,  they  may  be 
capitalized.  And  the  price  of  the  instrument  of  produc- 
tion that  bears  these  rents,  will  be  the  sum  of  the  rents, 
discounted  at  the  prevailing  rate  of  interest,  with  considera- 
tions of  risk,  etc.,  allowed  for.  The  reasoning  of  the  capi- 
talization theory  is  really  quite  simple.  Take,  for  ex- 
ample, a  piece  of  urban  site  land,  which  is  e.xpected  to 
bring  a  ix-rpetual  annuity  of  one  hundred  dollars.  The 
whole  economic  significance  of  the  land  is  contained  in  its 
services,  present  and  prospective.  The  possession  of  land 
under  certain  circumstances  brings  other  services,  as  social 
prestige,  than  the  services  which  can  be  alienated  to  a 
lessee.  But  in  this  case  I  am  abstracting  from  considera- 
tions of  that  sort,  and  also  from  the  factor  of  risk.  The 
whole  value  of  the  piece  of  land  under  consideration  comes 
from  the  value  of  the  one  hundred  dollars  a  year.  But 
these  annual  incomes  are  not  all  equally  valuable,  even 
though  all  expressed  as  one  hundred  dollars.  The  first 
one  hundred  dollars  is  due  one  year  hence,  the  tenth  ten 
years  hence,  the  thousandth,  a  thousand  years  hence.  The 
principle  of  perspective  comes  in — I  abstain  from  any  de- 
tailed discussion  of  the  theory  of  interest,  simply  stating 
that  in  a  general  way  I  agree  with  the  contention  that  Hme 
constitutes  the  essence  of  the  phenomenon,  or  rather,  the 
tendency  to  discount  the  future.  The  capital  price  of  the 
land  is  the  sum  of  an  infinite  convergent  series  of  the 

'  This  doctrine  as  applied  to  rates  on  call  loans  ap^iears  in  Seligman's  Prin- 
ciples of  Economics,  1912  ed.,  p.  ^95.  The  peculiarities  of  call  loans  have  also 
beer  discussed  by  C.  A.  Conant,  Principles  of  Money  and  Banking,  I,  p.  171. 
Conant  there  refers  to  a  discussdon  by  Jaseph  F.  Johnson,  in  Pol.  Sri.  Qtutr^ 
terly,  Sept.  1000,  p.  500.  There  are  some  very  interesting  distinctions 
between  the  "hire  price"  and  the  "purchase  price"  of  money  developed  by 
J.  A.  Hobson,  in  his  Gold,  Prices  and  Wages,  pp.  153  et  seq. 


i  -t 


THE   VALUE   OF   MONEY 


The  formula  is  as  fol- 


1 ' 
ij,. 


sin-'     I      SKH)     I      *1()0_ 

i.oo    I  (i.oj)2"r(i.u5j* 


.      -SKH) 

'T"(i.u.jr' 


"present  worths"  of  the  incomes 
lows:  capital  price  of  land 

when  the  rate  of  interest  is  s^'l-  The  limit  of  this 
series,  assuming  the  series  to  be  infinite,  is  $2000,  and 
a  simple  formula  for  calculating  it  under  the  assumptions, 
is  to  divide  $100,  the  annual  income,  by  .05,  the  rate  of  in- 
terest. Given  the  annual  income,  given  the  prevailing 
rate  of  interest,  the  capital  price  is  determined.  The  rela- 
tion may  be  illustrated,  roughly,  by  the  figure  of  a  caudle, 
a  disk,  and  the  shadow  of  the  disk  on  the  wall.  The  disk 
represents  the  annual  income,  the  shadow  on  the  wall  the 
capital  value,  and  #ie  distance  between  the  flame  and  the 
disk  the  rate  of  interest.  Increase  the  distance  between 
the  flame  ar  1  the  disk,  the  rate  of  interest,  and  the  shadow 
becomes  smaller;  shorten  the  distance,  and  the  shadow  is 
increased.  Similarly,  enlarge  the  disk,  and  the  shadow  is 
enlarged.  The  capital  value  ^'aries  directly  with  the  an- 
nual income ,  and  inversely  with  the  rate  of  discount.  Now 
my  purpose  here  does  not  involve  a  detailed  examinatioi 
of  the  validity  or  limitations  of  the  capitalization  theory. 
For  the  present,  the  only  question  is,  has  this  theory  any 
application  at  all  to  the  problem  of  the  value  of  money? 
It  offers  itself  as  a  general  theory  of  the  values  01  durable 
bearers  of  income.  Money  is  a  durable  bearer  of  in- 
come. 

The  capitalization  theory,  however,  is  of  no  use  for  the 
purpose  in  hand.  Money  does  not  obey  the  general  law  in 
the  relation  which  the  magnitude  of  the  income  bears  to  the 
rate  of  interest.  In  general,  the  income  and  the  rate  of 
discount  are  independent  variables.  Their  influence, 
operating  in  opposite  directions,  fixes  the  capital  value,  in- 
creasing income  increasing  the  capital  value,  increasing 
discount  rate  reducing  it.  In  the  case  of  money,  however, 
the  two  factors  are  not  independent.     The  short  time 


i  i 


THE  CAPITALIZATION  THEORY 


75 


money  rate  is  not,  to  be  sure,  identical  with  the  long  time 
rate  of  interest,  which  is  the  rate  of  discount  for  the  purpose 
in  hand.  But  the  two  tend  to  vary  together  in  the  long 
run  average  in  fact,  and  they  are  related  in  tb-  i:x- 
pcdation  of  those  who  aie  concerned  in  the  capitalization 
process. 

In  our  chapter  on  the  "Functions  of  Money,"  in  Part  III, 
it  will  be  shown  that  normally  there  tends  to  be  a  difference 
between  the  money  rates  and  the  long  time  interest  rates, 
the  long  time  rates  tending  to  be  higher  than  the  rates  on 
short  loans,  the  rate  on  very  short  loans  being  lower  than  the 
rate  on  somewhat  longer  short  time  loans,  and  the  call  loan 
rate  being  lowest  of  all.  The  explanation  of  this  must  be 
deferred  till  we  have  analyzed  the  functions  of  money. 
But  the  important  thing,  for  present  purposes,  is  that  the 
money  rates,  though  lower  than  the  "pure  rate"  of  interest, 
tend  to  vary,  in  long  time  averages,  with  that  "pure  rate,"  * 
and  that,  consequently,  the  income  from  renting  money, 
and  the  discount  rate  to  be  applied  in  capitalizing  that  in- 
come, are  not  independent  magnitudes,  but  tend  to  vary 
together.  They  thus  tend  to  neutralize  one  another.  If 
money  rates  go  up,  and  if  they  are  expected  to  stay  up  long 
enough  to  justify  (on  the  ordinary  capitalization  theory)  a 
rise  in  the  capital  value  of  money,  we  have  a  counteracting 
influence  in  the  long  time  interest  rate,  which  also  rises,  and 
tends  to  pull  down  the  capital  value  of  money.  To  recur 
to  our  illustration  of  the  candle  and  the  disk,  as  the  disk  in- 
creases in  diameter,  tJie  distance  between  the  candle  and 

'  One  "pure  rate"  of  interest,  for  loans  of  all  rx;riods  over,  say,  three  years, 
is  doubtless,  a  myth,  or  better,  a  methodological  device  for  simplifying 
thinking  in  connection  with  the  theory  of  interest,  and  the  capitalization 
theory.  It  is  not  necessary  for  our  purposes,  however,  to  give  detailed 
analysis  to  the  notion.  We  shall  discuss  the  capitalization  theory  as  we 
find  it,  assumin;;  that,  as  a  matter  of  fart,  the  difTerence  between  loans  of 
20  years  and  loans  of  35  years,  or  in  perpetuity,  of  equal  quality  in  other 
respects,  may  be  abstracted  from,  with  safety. 


Ill 


I    • 


76 


THE   VALUE   OF   MONEY 


the  disk  grows  greater,  and  so  the  shadow  tends  to  remain 
the  same. 

There  is  a  further  difficulty,  to  which  attention  will  be 
called  more  fully  in  later  chapters,  particularly  the  chapter 
on  "Dodo  Bones,"  and  the  chapter  on  the  "Functions  of 
Money."  In  other  cases,  in  general,  the  capital  value  is, 
as  the  capitalization  theory  requires  it  to  be,  a  true  shadow, 
a  passive  function  of  the  income  and  the  discount,  of  the 
disk  and  the  distance  between  the  candle  and  the  disk. 
In  the  case  of  money,  however,  the  income  is  causally  de- 
pendent, in  part,  upon  the  capital  value.  Money  can 
function  as  money  only  by  virtue  of  having  value.  The 
shadow  becomes  substance  in  the  case  of  money.  It  is  the 
value  of  money  which  makes  possible  the  money  work.  The 
capitalization  theory,  thus,  if  applicable  at  all,  must  be 
radically  modified  before  being  applied.  We  shall  sub- 
sequently, in  the  chapters  above  referred  to,  take  account  of 
this  fundamental  complication.  For  the  present,  we  can 
state  it  merely  as  a  problem:  how  can  we  construe  the  in- 
teraction of  the  income  value  of  money  and  the  capital 
value  of  money  in  such  a  way  as  to  avoid  a  circular 
theory? 

But  further,  the  capitalization  theory,  as  heretofore  for- 
mulated, like  the  doctrines  of  supply  and  demand  and  cost 
of  production,  assumes  money,  and  a  fixed  absolute  value  of 
money.  This  assumption  must  be  made  if  we  are  to  b" 
able  to  predict,  on  the  basis  of  the  capitalization  theory, 
that  a  given  annual  income,  at  a  given  rate  of  discount, 
will  give  a  specified  capital  value.  This  may  be  shown  by 
the  following  considerations:  If  men  anticipate  that  the 
value  of  the  income,  which  is  a  lued  sum  of  dollars,  is  to 
glow  less  in  the  future,  then  the  present  worth  of  the  bearer 
of  that  income  will  shrink  to  an  extent  greater  than  the 
"pure  rate"  of  interest  would  call  for.    The  principle  of 


L^--» 


THE   CAPITALIZATION  THEORY 


77 


"appreciation  and  interest"  comes  in.  The  nominal  in- 
terest, in  times  of  falling  value  of  money,  tends  to  exceed 
the  pure  rate  by  an  amount  which  compensates  for  the  loss 
in  value  of  future  income  as  the  dollar  falls  in  value.  We 
have  here,  however,  a  principle  different  from  the  principle 
of  time  discount.  It  is  not  the  influence  of  time,  which 
makes  a  given  value  appear  smaller  as  it  is  further  removed 
in  time,  but  it  is  an  anticipated  lessening  in  the  value  of  the 
income  itself,  that  counts.  In  terms  of  our  candle  and  disk 
illustration,  it  is  a  factor  affecting  the  size  of  the  disk, 
rather  than  a  factor  affecting  the  distance  between  the  disk 
and  the  candle.  For  the  purposes  of  calculation,  the  two 
elements  in  the  nominal  rate  of  interest  may  be  lumped 
together,  and  the  nominal  rate,  rather  than  the  pure  rate, 
may  be  taken  as  the  rate  of  discount  for  capitalization  pur- 
poses. But  for  theoretical  purposes,  the  two  must  be  kept 
distinct.  The  capitalization  theory  rests  on  the  assump- 
tion of  a  fixed  value  of  the  money  unit. 

That  the  fixed  value  of  the  money  unit  assumed  is  an 
absolute  value,  and  not  a  mere  "reciprocal  of  the  price 
level,"  may  be  proved  by  some  further  considerations  re- 
garding relations  among  these  same  factors.  Assume  a 
fall  in  the  rate  of  interest.  Then,  on  the  capitalization 
theory,  prices  of  lands,  stocks  and  bonds,  houses,  horses, 
and  all  items  of  wealth  which  give  forth  their  services 
through  an  appreciable  period  of  time,  will  rise,  and  with 
them  the  average  of  prices,  or  the  general  price  level,  will 
rise.*  If  one  hold  the  relative  conception  of  value,  according 
to  which  the  value  of  money  necessarily  falls  when  prices 

'The  price-level  is  a  weighted  average.  These  elements  dominate  it. 
Cf.  our  discussion,  in  the  chapter  on  the  "  Volume  of  Money  and  the  Volume 
of  Trade,"  infra,  of  the  elements  entering  into  trade.  We  shall  make  use 
of  the  r.apit.iliz.ition  theory  .^t  various  points  in  our  discussion  of  general 
prices,  cy.  the  chapter  on  "The  Passiveness  of  Prices,"  where  it  is  shown 
that  the  capitalization  theory  and  the  quantity  theory  are  irreconcilable. 


In    ' 


78 


THt   VALUE   OF   MONEY 


rise,  because  the  two  are  merely  obverse  phases  of  the  same 
thing,  then  this  rise  in  the  price  level  is,  ipsojaclo,  a  fall  in 
the  value  of  money.  But  we  have  seen  that  a  fall  in  the 
value  of  money  means,  on  the  "principle  of  appreciation 
and  interest,"  a  rise  in  the  interest  rate!  Hence,  we  would 
have  proved  that  a  fall  in  the  interest  rate  causes  a  rise  in 
the  interest  rate — which  is  absur?  If,  however,  we  recog- 
nize that  prices  can  rise  without  a  f.^ '  in  the  value  of  money, 
if,  i.  c,  we  use  the  absolute  conception  of  value,  this  diffi- 
culty disaijpears.  The  capitalization  theory  and  the  theory 
of  appreciation  and  interest  can  be  reconciled  only  on  the 
basis  of  the  absolute  conception  of  value. 

The  capitalization  theory,  then,  in  its  present  formula- 
tion, assumes  money,  and  a  fixed  absolute  value  of  money. 
It  is,  therefore,  inapplicable  to  the  problem  of  the  value  of 
money  itself. 

In  general,  none  of  the  polished  tools  of  the  economic 
analysis, — neither  cost  of  production,  the  capitalization 
theory,'  nor  the  law  of  supply  and  demand, — is  applicable 
to  the  problem  of  the  value  of  money.     The  reason  is  that 


■H 


'  There  is  an  extensive  body  of  controversial  literature  connected  with 
the  capitalization  theory,  which  it  is  unnecessary,  for  present  purposes,  to 
consider.  One  interesting  line  of  doctrine  is  that  developed  by  I)R  Scott 
{Jour,  of  Pol.  Ecoii..  Mar.  1910)  and  H.  J.  Davenjwrt  (Yale  Raicu;  Aur. 
(010),  in  which  ordinary  formulations  are  criticised  as  assuming  a  ''social 
rale"  of  interest,  and  in  which  the  effort  is  made  to  work  the  thing  out  on 
the  ha.Js  of  extreme  individualization,  each  man  having  a  rate  of  discount 
of  his  own.  I  have  accc|)ted  the  doctrine  in  the  general  form  in  which  it 
has  been  <leveliiped  by  Hohm-Hawerk  (in  criticism  of  Turgot  and  Henry 
(leorge  in  his  Capital  and  Interest),  by  I'"elter,  in  his  Principles  of  Economics, 
and  by  I'isher  in  his  Rate  of  Interest,  abstracting  from  points  on  which  these 
writers  disagree.  My  criticism  of  their  doctrines,  were  it  necessary  here  to 
develop  il,  would  rest  on  the  ground  that  their  treatment  of  the  general 
interest  problem  is  too  individualistic,  and  I  should  side  with  them  as  against 
Scott  and  l)aven|K)rt.    Hut  these  matters  are  aside  from  our  present  problem. 

In  our  chapter  on  "Marginal  Utility"  we  shall  meet  the  capitalization 
thc'Ty  again,  as  applied  to  tlic  value  of  money  bj-  l>a\id  Kinlc}'.  \Vc  shall 
also  take  it  up  in  the  chapters  on  "Dodo  Bones,"  and  "The  Functions  of 
Money." 


\ 


THE   CAPITALIZATION   THEORY 


79 


they  get  their  edge  from  money  itself.  The  razor  does  not 
easily  cut  the  hone.  It  is  to  this  fact,  I  think,  that  we  owe 
the  widespread  and  long  continued  vogue  of  a  theory  so 
crude  and  mechanical  as  the  quantity  theory.  In  the  next 
chapter  we  shall  show  that  the  utility  theory  of  value — 
which  we  shall  not  recognize  as  a  polished  tool!  -has  also 
failed  to  give  us  help  in  explaining  the  value  of  money. 


I 


Is  > 

I  M  J 


CHAPTER  V 
MARGINAL  UTILITY  AND  THE  VALUE  OF  MONEY 

A  GOOD  many  writers  have  attempted  to  apply  the  mar- 
ginal utility  theory  to  the  value  of  money.  Among  these, 
I  may  particularly  mention  Friedrich  Wieser,  Ludwig  von 
Mises,  Jose[)h  Schumpeter,  and.  in  America,  David  Kinley, 
and  H.  J.  Davenport. 

The  marginal  utility  theory  is  ordinarily  merely  a  thinly 
disguised  version  of  supply  and  demand  doctrine.  As 
usually  presented  in  the  text-books,  we  have  an  anahsis 
of  the  phenomenon  of  diminishing  utility  of  a  given  com- 
modity to  a  given  individual,  illustrated  by  a  diagram,  in 
which  the  ordinates  represent  diminishing  psychological 
intensities.  Often  a  money  measure  is  given  to  these  di- 
minishing intensities,  and  the  curve  is  presented  as  the 
demand  schedule  of  a  given  individual.  Then,  with  little 
further  analysis,  a  leap  is  made  to  the  market,  and  it  is 
assumed  that  the  market  demand-curve,  of  many  individ- 
uals, differing  in  wealth  and  character,  is  a  utility-curve, 
and  value  in  the  market  is  "explained"  by  means  of  margi- 
nal utility.  I  need  not  here  repeat  my  criticisms  of  this 
procedure.'  It  gives  simply  a  confused  statement  of  the 
doctrine  of  supply  and  demand.  The  analysis  of  utility 
which  precedes  the  discussion  of  market  demand  is  wholly 
irrelevant,  and  merely  nuxes  things  up.  That  such  a 
conception  is  of  no  use  in  solving  the  problem  of  the  value 
of  money  has  been  sufficiently  indicated  in  the  chapter  on 
supply  and  demand. 

'  Social  Value,  chs.  3-7.  The  point  is  discussed  infra  in  the  present 
chapter. 

80 


li* 


\ 


MARGINAL   UTILITY 


8l 


Sometimes  the  contention  is  made  that  money  is  unique 
among  goods  in  having  "no  power  to  satisfy  human  wants 
except  a  power  to  purchase  things  which  do  have  such 
power." '  This  contention,  in  Professor  Fisher's  view, 
precludes  the  application  of  the  marginal  utility  theory  to 
the  problem  of  the  value  of  money,  and  he  makes  no  use 
of  marginal  utility  in  his  explanation.  Indeed,  in  the  pas- 
sage from  which  this  quotation  is  taken,  Professor  Fisher 
sa^s  that  the  quantity  theory  of  money  rests  on  just  this 
peculiarity  of  money.  Not  all  writers  who  contend  that 
money  has  no  utility  per  sc,  however,  have  felt  it  necessary 
to  give  up  the  marginal  utility  theory  as  a  theory  of  money, 
as  we  shall  later  see. 

On  the  other  hand,  writers  of  the  "commodity  school" 
(or  "metallist  school"),  writers  who  see  the  source  of  the 
value  of  money  in  the  metal  of  which  it  is  made,  can  apply 
the  utility  theory  readily  to  the  value  of  money,  making 
the  value  of  money  depend  on  the  marginal  utility  of  gold, 
or  the  standard  metal,  whatever  it  is.  To  the  writers  of 
this  school,  it  is  incredible  that  anything  which  has  no  util- 
ity should  become  money.  Money  must  be  either  valuable 
itself,  or  else  a  representative  of  some  valuable  thing.  The 
value  of  money  comes  from  the  value  of  the  standard  of 
value,  and  that  value  may,  so  far  as  the  logic  of  the  situa- 
tion is  concerned,  be  as  well  explained  by  marginal  utility 
as  the  value  of  anything  else.  Typical  of  this  view  is  Pro- 
fessor W.  A.  Scott's  discussion  in  his  Money  and  Banking- 
though  the  emphasis  there  is  not  on  marginal  utility  as  the 
explanation  of  the  value  of  the  standard,  but  on  the  value 
(conceived  of  as  an  absolute  quantity)  of  the  standard  as 
essential  to  the  existence  of  money,  and  the  performance 
of  the  money  functions.  Professor  Scott  attacks  vigorously 
and  effectively  Nicholson's  exposition  of  the  quanlil>  the- 


'  Fisher,  I,  Purchming  Power  of  Money,  p.  ^2. 


Edition  of  1903. 


im 


82 


THE  VALUE   OF  MONEY 


orj','  where  the  assumption  is  made  that  money  consists 
of  dodo-boncs  (the  most  useless  thing  Nicholson  could 
think  of).  Most  quantity  theorists  would  share  Nicholson's 
view  that  dod  )-bones  would  serve  as  well  as  anything  else 
for  money — or,  to  put  the  thiug  less  fantastically,  that  the 
substance  of  which  money  is  made  is  irrelevant,  that  the 
only  question  is  as  to  the  quantity,  rather  than  the  quality, 
of  the  money-units,  and  the  quantity  of  the  money-units, 
not  in  pounds  or  bushels  or  yards,  but  in  abstract  number 
merely.  For  writers  who  seek  the  whole  explanation  of 
the  value  of  money  in  its  monetary  application,  and  who 
see  that  money,  (/ua  money,  cannot  administer  directly 
to  human  wants,  the  view  that  Professor  Fisher  expresses, 
namely,  that  money  has  no  utility,  and  is  unique  among 
goods  in  this  respect,  seems  on  the  surface,  to  have  justili- 
cation.  On  the  surface  merely,  however.  Money  is  not 
unique  among  goods  in  being  wanted  only  for  what  it  can 
be  traded  for.  Wheat  and  corn  and  stocks  and  bonds  and 
everything  else  that  is  speculated  in  is  wanted,  by  the 
speculators,  only  as  a  means  of  getting  a  profit  - — they  are 
remoter  from  the  wants  of  the  man  who  purchases  them 
than  the  money  profit  he  anticipates.  Ginsing,  in  America, 
has  value,  though  consumed  only  in  China.  And  there  are 
people,  particularly  jewelers,  who  often  want  money  as  a 
raw  material  for  consumption  goods.  The  difference  is  at 
most  a  difference  of  degree — and  of  slight  degree  indeed  in 
the  case  of  such  things  as  bonds,  which  count  on  the 
"goods"  side  of  the  quantity  theory  price  equation,  but 
which  really  are  in  all  cases  remoter  than  money  itself  from 
human  wants.  Money  really  stands,  for  the  purpose  in 
hand,  on  the  same  level  as  any  other  instrumental  good.^   It 

'  Cf.  the  chapter  on  "  Dodo  Bones,"  iitfni. 

-  Cf.  ilenger's  art.  "GcId,"  Conrad's  Ilandi^vrlcrbtuk,  32S,  3rd  cd.,  vol.  iv, 
p.  566. 

'  Cf.  Helfferich,  Das  Gild,  ed.  1903,  p.  4£c. 


MARGINAL  UTILITY 


83 


does  not  give  forth  services  directly,  as  a  rule.  Neither  di)es 
a  machine,  or  an  acre  of  wheat  land,  or  goods  in  a  whole- 
saler's warehouse.  Exchange  is  a  productive  process,  an  es- 
sential part  of  the  present  process  of  production.  Money  is  a 
tool  which  enormously  facilitates  this  process.  It  has  its  pe- 
culiarities, no  doubt.  One  of  them  is  and  money  is  not 
unique  in  this  as  will  later  appear— that  it  must  have  ;  ,7mc 
from  non-monetary  sources  '  beft)re  it  can  perform  its  own 
special  functions,  from  some  of  which  it  draws  an  increased 
value.  But  there  seems  to  me  to  be  nothing  in  the  conten- 
tion quoted  from  Professor  Fisher,  to  justify  setting  money 
sharply  off  from  all  other  things,  or  to  justify  the  view  that 
marginal  utility  is  inapplicable  to  the  value  of  money,  if  it 
be  applicable  to  the  value  of  anything  at  all  that  is  not 
destined  for  immediate  consumption.  I  do  not  believe  that 
the  marginal  utility  theory  is  valid  for  any  class  of  goods, 
not  even  those  for  immediate  consumption.  Where  marginal 
utility  theory  is, — as  in  the  conventional  text-book  expo- 
sitions— merely  another  name  for  supply  and  demand 
theory,  it  is,  as  already  shown,  not  applicable  to  the  value 
of  money,  and  it  is  useful  in  the  surface  explanation  of  mar- 
ket-prices of  goods.  But  where  marginal  utility  theory 
really  seeks  to  get  at  value  fundamentals,  it  is  precisely  as 
valid  for  money  as  for  goods  of  other  sorts — invalid,  in  my 
judgment,  in  both  places,  and  for  the  same  reasons  in  both. 

Among  the  writers  who  would  apply  the  utility  theory  to 
money,  while  still  insisting  that  money,  as  such,  has  no  util- 
ity, are  Wieser,  Schumpeter — who  accepts  Wieser's  theory 
in  its  main  outlines — and  von  Mises,  who  develops  a  notion 
very  different  from  that  of  the  other  two. 

Wieser's  doctrines  are  set  forth  in  two  expositions,  sep- 
arated by  five  years,  the  second  representing  a  considerable 
development  in  his  thought,  though  resting  in  part  on  the 
'  Discussed  more  fully  infra,  chapter  on  "Dodo  Bones." 


1 


m  I 


84 


THE   VALUE   OF   MONEY 


first.  The  first  is  an  address  upon  the  occasion  of  his  ac- 
cession to  the  professorship  at  the  University  of  Vienna, 
in  Hp4,  and  is  published  in  the  Zcitschrijt  Jitr  Volkridrls- 
chajt,  Sozialpolitik  und  Venvaltun^,  vol.  ij  entitled,  "Der 
(Jeldwert  und  seine  geschichtlichen  V'eriinderungen."  The 
second  is  a  discussion,  partly  written  and  partly  spoken, 
"Der  Geldwert  und  seine  V'eriinderungen"  (written),  and 
"Ueber  die  Messung  der  Veriinderungen  des  Geldwertes" 
(spoken),  in  Scltrijtcn  des  V'crcins  fur  Sozialpolitik,  Rc- 
fcrate  zur  Tasting,  no.  132,  1909.  For  the  purpose  in  hand, 
a  brief  statement  of  one  or  two  points  would  suffice  to  show 
the  futility  of  Wieser's  effort  to  get  an  explanation  of  the 
value  of  money  via  marginal  utility,  but  I  think  that  readers 
may  be  interested  in  a  fuller  account  of  Wieser's  doctrine, 
just  because  it  is  Wieser's,  and  so  shall  undertake  to  give  a 
more  systematic  account  of  it.  For  brevity,  in  the  exposi- 
tion which  follows,  I  shall  refer  to  the  first  article  as  "I," 
and  to  the  second  as  "II."  ' 

Wieser  holds  that  it  is  possible  to  have  money  wholly 
apart  from  a  commodity  basis  (I,  p.  45),  citing  the  Aus- 
trian Staatsnoten  as  a  case  in  point.  The  reason  for  giving 
them  up  is  that  they  do  not  circulate  in  foreign  trade.  Gold 
fulfills  its  international  money-functions  the  more  easily 
because  of  its  various  employments,  but,  after  it  is  thor- 
oughly historically  introduced,  as  money,  it  could  fulfill 
its  money  functions  even  if  all  these  employments  be 
thought  away  (46).  Wieser  gives  no  argument  for  this 
contention,  and  its  validity  will  be  examined  later.-  There 
are,  he  says,  two  sources  for  the  value  of  gold,  the  money 
use  and  the  arts  use,  interacting.  Money  is  further  removed 
from  wants,  not  only  than  consumption  goods,  but  also 


'  I  make  virtually  no  reference  to  the  "s[X)kcn"  i)art,  which  i=i  chiefly 
concerned  with  index  numbers. 
'  Chapter  on  "Uodo  Bones." 


MARGINAL  UTILITY 


«5 


than  production  goods,  which  are  but  consumption  goo<ls 
in  the  seed.    The  latter  are  technically  destined  for  definite 
g(HMls.    But  money  may  be  used  to  nrocure  whatever  giMul 
you  please,  in  exchange.    (The  al)soluteness  of  this  distinc- 
tion, also,  may  be  questioned.    Pig  iron  is  almost  as  unspe- 
cialized  as  money  in  its  relation  to  wants,  since  tools  enter 
into  the  production  of  almost  every  service  that  human 
wants  require,  from  surgical  operations,  through  instru- 
mental music,  to  wheat  and  horse-shoes.     On  the  other 
hand,  money  is  not  the  only  thing  by  means  of  which  other 
things  are  purchased.    The  extent  of  barter  in  modern  life 
will  wait  for  later  discussion.*    I  do  not  think  that  any 
sharp  distinction  between  money  and  all  other  things  is 
valid.)     Wieser  complains  of  the  older  economics  which 
treats  money  as  a  commodity.    And  he  contends  that  as 
money  and  commodities  show  a  contrast  in  their  essence 
(IVesen),  they  should  also  manifest  a  contrast  in  the  laws 
of  tJ-  ir  values,  even  though  the  fundamental  general  theory 
of         e  applies  to  both  (I,  47).    He  finds  in  representatives 
of  n.jney  (Geldsurrogate)  and  in  velocity  of  circulation  of 
money,  factors  which  are  lacking  in  commodities.    (A<jain 
a  question  must  be  interjected  by  the  writer.    Are  not  cor- 
poration securities  issentially  like  Geldsurrogate  from  this 
angle?    And  do  not  goods  vary  greatly  in  the  number  of 
times  they  are  exchanged?    What  of  the  speculative  mar- 
kets, where  more  sales  are  made  in  an  active  market,  at 
times,  than  there  are  commodities  or  securities  of  the  type 
dealt  in  in  existence?)    The  value  of  money  is  essentially 
bound  up  with  the  money-service.    Wieser  indicates  that 
he  is  not  talking  about  the  subjective  value  of  money, 
but  its  objective  value,  using  the  popular  meaning  of  the 
term,  which,  he  says,  is  not  strictly  logical,  but  is  useful:  the 
relation  of  money  to  all  other  goods  which  are  exchanged, 
'Chapter on  "Barter." 


86 


THE  VALUE  OF  MONEY 


i  ! 


the  purchasing  jiower  of  money.  This  depends  on  goods 
as  well  as  on  money.  In  the  second  article,  Wieser  relines 
and  elaborates  his  conception  of  the  objective  value  of 
money,  seeking  to  get  away  from  the  notion  of  relativity 
which  is  involved  in  the  conception  of  purchasing  iH)wer, 
and  to  get  an  absolute  conception,  which  shall  be  a  causal 
factor  in  the  determination  of  general  prices,  rather  than 
a  mere  reflection  of  them.  It  is  to  be  a  coefiicient  with  the 
objective  values  of  gomls  in  determining  prices,  A  change 
in  general  prices  may  be  caused  by  a  change  in  the  value 
of  money,  and  may  Ije  caused  by  a  change  in  the  values 
of  goods  (II,  p.  511).  In  explaining  this  objective  value 
concept  (which,  in  its  formal  and  logical  aspects,  is  in 
many  ways  similar  to  the  absolute  social  value  concept 
maintained  by  the  present  writer,  though,  in  the  present 
writer's  judgment,  inadequately  accounted  for  ^  Wieser, 
so  far  as  a  psychological  causal  theor\'  is  concemc  ;  Wieser 
objects  to  the  term,  "objective  value"  which  he  had  useci 
in  the  earlier  article.  He  prefers  "volkswirtschaftlicher 
Wert."  (This  term  is  perhaps  best  rendered  "public 
economic  value,"  for  present  puqxjses,  to  distinguish  it, 
on  the  one  hand,  from  individual  or  personal  value,  and, 
on  the  other,  from  the  social  economic  value  concept  of  the 
present  writer.  Ac  the  same  time,  the  connotation  of  a 
communistic  or  authoritive  value  must  not  be  read  into  the 
term.  It  is,  in  its  formal  and  logical  aspects,  really  the  most 
common  of  all  the  value  notions,  and  may,  best  of  all  per- 
haps, be  translated  simply  "value,"  or  "economic  value," 
or  "absolute  value."  But  for  the  present  discussion,  we 
shall  call  it  "public  economic  value.")  This  public  economic 
value,  in  the  case  of  goods,  is  not  a  mere  objective  relation 
between  a  good  and  i(3  price-equivalent.  It  is  a  subjective 
(psychological)  value,  like  personal  value.  If  one  wishes  to 
call  it  objective  value,  one  is  using  objective  in  the  sense 


L^: 


MARGINAL  tmi.ITY 


87 


of  the  general  subjective  as  distinguished  from  the  personal 
individual  idiosyncracy  (II,  p.  502).  The  objective  exchange 
value  of  gooda  (here  VVieser  uses  "objektiver  Tauschwert  " 
as  the  equivalent  of  his  "  volkswirtschaf tlicher  Wert"  above 
mentioned)  is  the  common  subjective  part  of  the  individual 
valuations  leaving  out  the  remainrlcr  of  individual  pecul- 
iarities ("  der  allgemein  subjective  Teil  der  jicrstinlichen 
Wcrtschiitzungen  mit  V'erschweigung  des  individual  ei- 
genartig  cmpfundenen  Restes").'  Wieser  does  not  seem  to 
me  to  think  out  clearly  the  distinction  between  absolute 
and  r  'itive  value  in  this  connection.  He  wishes  to  get 
something  more  fundamental  than  a  mere  relation  between 
goods  and  money;  he  wishes  a  psychological  phenomenon. 
He  wishes  to  have  a  value  of  goods  which  can  be  set  over 
against  the  value  of  money,  the  two,  in  combination,  de- 
termining prices.  And  yet,  he  wishes  somehow  to  get  these 
out  of  the  prices  themselves.  "We  must  seek  a  concept  of 
the  public  economic  value  of  money  which,  to  be  sure,  pro- 
ceeds from  the  general  price- level  (Preisstand) ,  but  which 
excludes  from  its  content  everything  that  comes  purely 
from  the  value  of  goods"  (II,  511).    To  the  public  eco- 

'  In  its  psychological  explanation,  this  bears  somewhat  the  same  relation 
to  the  social  value  concept  of  the  jiresent  writer  that  the  social  mind  concept 
of  Giddings  and  I^wes  bears  to  the  social  mind  concept  of  the  present 
writer.  Cf.  Social  lvalue,  ch.  g.  Wieser's  concept  excludes  individual 
[K-culiarities.  It  is  an  alistraction  from  individual  values,  a  distillation  of 
their  common  essence.  The  social  value  concept  of  the  present  writer  is  a 
focal  point  in  which  are  summarized  all  the  individual  values,  whether  alike 
or  divergent,  and  not  merely  the  individual  marginal  utilities  of  the  goods 
in  question  (Wieser's  only  factors)  but  also  the  individual  emotions  which 
affect  the  distribution  of  wealth.  Wieser's  concept  is  based  on  a  study  of 
individual  marginal  utilities  considered  as  atomic  elements;  that  of  the 
present  writer  looks  on  the  social  mind  as  an  organic  whole,  in  which  in- 
dividual mental  processes  arc  phases,  and  does  not  tr>'  to  synthesize  a  social 
value  out  of  elements,  but  rather,  to  analyze  it  into  e'ements.  In  the  func- 
tion in  economic  theory  for  which  they  are  destined.  .  jwever.  the  two  con- 
cepts have  much  in  common.  Both  seek  to  be  the  fundamental  economic 
quantity.  Both  seek  to  be  causal  forces,  l>nng  behind  prices,  even  though 
expressed  in  prices;  both  oppose  the  conception  of  value  as  merely  relative. 


88 


THE   VALUE   OF   MONEY 


[it 


nomic  value  of  money,  however,  Wieser  gives  no  independ- 
ent definition.    The  definition  runs  in  terms  of  the  values 
of  the  goods.    "The  value  of  money  rises  when  the  same 
inner  values  (innere  Wertc)  cf  commodities  are  expressed 
in  lower  pricer.;  it  falls,  when  they  are  expressed  in  higher 
prices"  (II,  511-12).     "Inner  value"  of  goods  is  not  de- 
fined, but  I  take   it  that  Wieser  uses  it  as  meaning  es- 
sentially the  samc^  thing  as  the  public  economic  value  al- 
ready described— an  absolute  value.     {Cf.   the  usage  of 
Menger  and  von  Mises,  infra,  in  this  chapter,  with  respect 
to  the  terms,  "inner"  and  "outer"  value.)    The  definition 
is  not  strictly  circular,  perhaps,  but  at  least  it  is  pretty 
empty.    Nothing  appears  to  give   the  value  of  money, 
as  distinct  from   its  purchasing  power,  an  independent 
standing.    The    reason    for    this    will    later    appear.    It 
should  be  noted,  however,  that  the  definition  is  not  in 
terms  of  prices  or  purchasing  power.    Prices  might  re- 
main   unchanged,    in    Wieser 's    scheme,    and    yet    the 
value  of  money  sink,  if  the  inner  values  of  goods  should 
sink. 

The  value  of  money,  thus  defined,  is  to  be  explained  by 
marginal  utility.  But  money  has  no  marginal  utility  of  its 
own,  it  has  no  subjective  use-value,  but  only  a  subjective 
exchange  value,— derived  from  the  use-value  (marginal 
utility)  of  the  commodity  purchased  with  the  marginal 
dol'ar  (II,  507-8).  This  subjective-exchange  value  of 
mo.  ey  is  the  personal  value  of  money,  as  distinguished 
from  its  public  economic  value,  and  is  the  cause  of  the 
public  economic  value.  The  personal  value  of  money 
changes  (1)  with  the  volume  of  one's  personal  income,  (2) 
with  the  intensity  of  one's  need  for  money,  and  (3)  with 
market  prices.  The  personal  value  of  money  is  directly  in- 
fluenced and  measured  only  in  exchanges  for  consumption 
goods.    Expenditures  of  other  kinds  atYect  it  only  indirectly 


MARG    TAL  UTILITY 


So 


by  leaving  less  for  consumption  expenditures.  The  laborer 
always  reckons  with  the  personal  value  of  money,  but  not 
the  business  man,  in  his  business  calculations.  As  in  the 
case  of  goods,  we  pass  from  personal  to  public  economic 
value  (II,  509).  The  personal  value  of  money  depends 
on  the  relation  between  an  individual's  money  income, 
and  his  real  income,  in  terms  of  goods.  The  public  economic 
value  of  money  depends  on  the  money  income  of  the  com- 
munity as  a  whole,  and  its  real  income.  (II,  516-18). 
Money  income  grows  faster  than  real  income,  through  the 
extension  of  the  money  economy.  Money  income  is  not, 
like  real  income,  dependent  on  quantity.  The  mere  exten- 
sion of  the  money  economy  increases  the  volume  of  money 
income,  lowers  the  personal  value  of  money,  lowers  its 
public  economic  value,  and  raises  prices.  Witness  the  effect 
on  a  rural  community  of  bringing  it  into  the  great  market, 
where  all  costs  are  reckoned  in  money  and  rising  costs 
compel  rising  prices.  Hence,  there  is  a  tendency  for  the 
public  economic  value  of  money  to  sink,  and  this  has  been 
the  historical  fact  (I,  II,  519-520.) 

Criticism  of  this  theory  is  almost  superfluous.  There  are 
elements  in  Wieser's  discussion,  not  here  presented,  which 
have  very  considerable  importance,  and  which  will  be 
presented  in  a  later  chapter  when  the  criticism  of  the 
quantity  theory  is  taken  up.  Wieser  deals  some  heavy 
blows  to  the  quantity  theory.  But  his  constructive  doc- 
trine presents  the  clearest  possible  case  of  the  Austrian  cir- 
cle. The  value  of  money  depends,  not  on  its  subjective 
use-value,  its  own  marginal  utility— it  has  none.  The  value 
of  money  depends  on  its  subjective  value  m  exchange,  the 
marginal  utility  of  the  goods  which  are  exchanged  for  it. 
But  these  depend  on  prices.  And  prices  depend,  in  part, 
on  the  value  of  money  itself!  This  circle,  present  in  every 
form  of  the  Austrian  theory  which  seeks  a  causal  explana- 


i 


f\ 


I   i, 


i"i^ 


90 


THE  VALUE  OF  MONEY 


tion  of  value  and  prices  by  means  of  marginal  utility,* 
though  often  less  obviously  present,  is  here  quite  glaring. 
The  distinction  between  volume  of  money  income  and 
quantity  of  money  is,  on  the  other  hand,  an  important  one, 
and  will  be  emphasized  when  the  quantity  theory  is  taken 
up.-  One  further  point  in  VVieser's  doctrine  calls  for  com- 
ment. It  is  strange  indeed  to  find  an  Austrian  seeing  in  a 
rise  in  money  costs  a  cause  of  a  general  rise  in  prices. 
The  Austrian  doctrine  is  rather  that  rising  money  costs 
are  rejkctions  of  rising  general  prices.  Wieser's  doc- 
trine that  the  extension  of  the  money  economy  to  rural 
regions,  compelling  the  farmer  to  reckon  all  his  costs  in 
money  and  so  to  raise  his  prices,  "as  been  adequately  crit- 
icised by  von  Mises,  who  points  .ut  that  Wieser  sees  only 
half  the  phenomenon;  that  eggs  and  butter  are,  indeed, 
higher  in  price  in  the  rural  region  when  it  comes  into  con- 
tact with  the  city,  but  that  they  are  correspondingly  lower 
in  the  city  from  the  same  cause.  On  the  other  hand,  the 
doctrine  of  costs  is  not  the  whole  point  in  Wieser's  notion 
of  the  extension  of  the  money  economy  as  a  cause  of  higher 
prices,  and  we  shall  deal  with  the  doctrine  again,  in  a 
different  connection. 

By  devitalizing  the  marginal  utility  theory,  by  stating 
it  in  such  a  way  that  it  makes  no  causal  assertions,  and  in 
such  a  way  that  it  leaves  the  rea'  value  problem  untouched, 
it  is  possible  to  free  it  from  the  circle  just  pointed  out. 
Schumpeter  does  so  state  it. 

Schumpeter's  theory  of  value,  ^  though  he  attributes  it 

'  Social  Value,  chs.  5,  6,  7,  and  15.  Infra  in  the  present  chapter. 
-  See  esifccially  the  chapter  on  "The  Passiveness  of  Prices." 
'Cf.  the  writer's  "Schumpeter's  l)>Tiamic  Kconomics,"  Political  Science 
Quarterly,  Dec.  1915.  Schumpeter's  theory,  as  there  presented,  is  based 
on  the  liricf  discussion  in  his  Thcorie  dcr  ■u'irlscliaflliclicn  Efitwickluiig  (Leip- 
zig, iqi2),pp.  61  ft  siq.,  105,  166-667,  116,  464,  and  on  Schumpeter's  verbal 
expositions  of  the  theory  during  his  American  trip.    Since  that  account  was 


MARGINAL  UTILITY 


91 


to  Bohm-Bawerk,  seems  to  the  present  writer  to  be  essen- 
tially different.  Bohm-Bawerk  undertakes  to  explain  the 
value  (objective  value  in  exchange)  of  each  good  by  its 
own  marginal  utility  to  different  individuals,  buyers  and 
sellers  of  the  good — indeed,  by  its  marginal  utility  to  four 
individuals,  the  two  "marginal  pairs."  '  He  sees  at  points 
that  the  prices  of  other  goods  are  sometimes  factors,  making 
marginal  utility  give  way  to  "subjective  value  in  exchange," 
as  the  determinant  of  an  individual's  behavior  toward  a 
given  good  in  the  market — as  in  his  much  discussed  over- 
coat illustration.-  But  Bohm-Bawerk  never  gets  out  of  the 
circle  which  this  reaction  of  the  market-prices  on  the  individ- 
unl  subjective  values  involves.  Schumpeter  seems  to  rise 
to  a  higher  conspectus  picture,  which,  in  form,  avoids  the 
circle.    His  picture  is  that  of  a  vast  equilibrium,  in  which, 

published,  Professor  W.  C.  Mitchell  has  given  an  account  of  Schumpeter's 
doctrine,  based  on  the  fuller  discussion  in  Schumi^etcr's  Wesen  und  Ilauptiii- 
htilt  dcr  Ihcorctischcn  Sationdokonomir,  which  is  in  accord  with  the  account 
here  given.  (Mitchell,  in  Papers  and  Proceeding!:,  Supplement  to  March, 
1916,  American  Econ.  Rev.,  p.  150.)  Mitchell  attributes  the  essential  ele- 
ments of  Schumpeter's  theory  to  Walras.  The  first  exposition  in  English 
of  the  a)nception,  so  far  as  the  present  writer  is  aware,  is  in  Irving  Fisher's 
Mathematical  Investigations  in  the  Theory  of  Value  and  Prices,  Trans.  Conn. 
Acad,  of  Arts  and  Sciences,  1892.  Professor  Fisher,  in  his  i)reface,  accords 
priority  to  Jevon?,  Auspitz  and  Lieben,  and  to  Walras.  The  conception  is 
not  to  be  found  in  Jevons,  though  many  of  the  ideas  involved  in  it  are.  The 
first  non-mathematical  exiMsition  of  the  doctrine,  so  far  as  I  know,  is  by 
Schumpeter.  .\s  will  be  made  clear  in  a  footnote  at  the  enJ  of  the  present 
chapter,  neither  Wicksteed  nor  Daveniwrt  has  really  forced  the  problem 
through,  to  the  full  equilibrium  picture,  and  neither  has  escaped  the  Aus- 
trian circle.  I  do  not  concur  with  Professor  Mitchell's  interpretation  of 
Wicks' :ed  on  this  point.  It  may  well  be  that  mathematical  method,  with 
a  system  of  simultaneous  equations,  was  necessary  for  the  development  of 
the  idea.  If  so,  it  illustrates  both  the  strength  and  the  weakness  of  mathe- 
matical economic  theory:  it  clarifies  thinking,  but  it  gets  no  causal  theory! 
.•\t  all  events,  no  causal  theory  emerges  in  this  case. 

'  Positive  Theory  of  Capital,  fik.  I\',  and  GrundzU^e  der  Theoric  des  U'irt- 
sehafllichcH  Giitencirts,  in  Conrad's  Jahrbikher,  1886.  The  writer  who  would 
adhere  to  Schumpeter's  doctrine  must  give  up  all  notion  that  any  individual 
uccupicb  a  critical  "marginal"  position.  .\11  men  arc  equally  marginal  in 
Schumpeter's  scheme. 

*  Positive  Theory  of  Capital,  p.  156. 


92 


THE  VALUE  OF  MONEY 


instead  of  attributing  the  market  value  of  each  good  to  its 
own  marginal  utility,  you  explain  the  exchange  ratios '  of 
every  good  to  every  other  good,  all  at  once,  by  reference  to 
a  total  situation:  given  the  number  of  goods  of  each  class, 
given  the  number  of  individuals  in  the  market,  given  the  dis- 
trihiilion  of  each  class  of  goods  among  the  individuals,  given 
the  utility -c«n'cs  (not  marginal  utilities)  of  each  good  to  each 
individual,  an  equilibrium  will  be  reached,  through  trading, 
in  which  ratios  between  marginal  utilities  of  each  kind  of 
good  to  each  individual  are  inversely  proportional  to  the 
abstract  ratios  (ratios  of  exchange)  between  the  same 
goods,  each  measured  in  its  own  unit.  The  ratios  are  ab- 
stract ratios,  between  pure  numbers,  so  far  as  the  market 
ratios  are  concerned;  the  ratios  in  the  mind  of  each  in- 
dividual are  coi  ete  ratios,  between  marginal  utilities. 
The  scheme,  thus  stated,  says  nothing  as  to  the  causal 
relation  between  marginal  utility  and  market  ratios;  it 
merely  states  certain  mathematical  relations  between  each 
individual  system  of  marginal  utilities  on  the  one  hand, 
and  the  abstract  market  ratios  on  the  other.  By  avoiding 
assertions  as  to  causation,  it  avoids  a  causal  circle.  In  such 
a  situation,  marginal  utilities  and  market  ratios  are,  in 
reality,  alike  resultants,  efccts,  of  the  given  quantities  of 
goods,  distribution  of  good^,  numbers  of  buyers  and  sellers, 
and  individual  u\\\\iy-cuncs — not  marginal  utilities.  To 
this  picture,  one  may  add — what  Schumpeter  does  not 
add — the  curves  showing  time-preferences  of  each  individ- 
ual for  each  sort  of  good,  and  (an  element  which  Schum- 
peter does  include)  the  curves  of  <//i-utility  for  the  individ- 
uals who  |)roduce  each  kind  of  gctod.  The  system,  it  may 
be  noted,  is  as  good  a  proof  of  real  cost  doctrine  as  it  is  of 
utility  doctrine. 

'  SchumiK'tcr's  silii'me  gives  no  mnney-i)ritc?.     N'o  form  of  this  scheme 
gives  any  quanlitatiw  values.    Xolliing  l)ut  ratios  tan  tome  from  it. 


MARGINAL   UTILITV 


93 


Such  a  picture,  I  submit,  avoids  the  circle  which  is  pre- 
sented in  all  other  formulations  of  the  Austrian  theory  of 
value.  I  wish,  however,  to  indicate  its  limitations  as  a  theory 
of  value,  and  the  impossibility  of  any  application  of  it  to 
the  problem  of  the  value  of  money,  (i)  Its  data  are  in- 
accessible: nobody  could  possibly  know  all  the  utility-curves 
and  all  the  time-preference  curves  (and  disutility  of  labor- 
curves,  etc.)  of  all  goods  to  all  individuals  in.  say,  the  United 
States.  To  explain  market  ratios  by  utility-curves  is  a  case 
of  ignotum  per  ignotius,  so  far  as  practical  application  is 
concerned.  Moreover,  the  scheme  is  so  difficult  to  visualize 
that  it  is  useless  as  a  tool  of  thought — as  one  will  fmd  who 
tries  to  think  it  through,  without  the  aid  of  higher  mathe- 
matics, for  ten  goods,  and  ten  persons,  with  unequal  distri- 
bution of  wealth,  and  different  utility  curves,  time-pref- 
erence curves,  and  disutility-curves  for  each  kind  of  good 
to  each  individual.  (2)  The  scheme  must  assume  smooth 
curves  and  infinitesimal  increments  in  consumption,  which 
is  a  fiction  so  far  as  the  individual  psychology  is  concerned. 
Withciut  this  assumption,  the  point- for-point  correspond- 
ence between  individual  and  market  ratios  does  not  exist. 
It  is  only  in  social-value  curves,  or  in  demand-curves  in  the 
big  market  (which  are  social-value  curves,  expressed  in 
money),'  that  you  have,  as  a  matter  of  fact,  the  right  to 
smooth  out  your  curves.  (3)  The  theory  must  assume  the 
frictionless  static  state,  in  which  marginal  adjustments  are 
perfectly  accomplished,  and  equilibrium  really  reached. 
Without  this  assumption,  again  the  point-for-point  inverse 
correspondence  of  market  ratios  and  individual  ratios  fails. 
But  this  makes  it  quite  impossible  to  ai)i)ly  the  doctrine 
to  any  functional  theory  of  the  value  of  money,  or  to  bring 
money  in  any  realistic  way  into  the  scheme.  As  will  be 
shown  more  ''^lly  in  later  chapters,  money  functions  in 
'  Supra,  chs.  on  "Value"  and  "Supply  and  Demand." 


94 


THE  VALUE   OF  MONEY 


III 


9- 


I 

?  I 
I  ; 
,:  I  « 

J  I:  « 


bringing  about  just  the  absence  of  friction  which  static 
theory  assumes.  That  is  what  money  in  for.  The  functional 
theory  of  money,  therefore,  cannot  abstract  from  friction 
and  dynamic  change.'  It  is,  of  course,  possible,  on  this 
scheme  to  pick  out  any  one  of  the  goods  in  the  system,  say 
the  i-ioooth  part  of  a  horse,  call  it  the  "money-unit,"  and 
determine  a  set  of  money-prices.  These  "money-prices" 
are  already  given  in  the  scheme  in  the  ratios  between  the 
abstract  numbers  of  this  unit  and  the  abstract  numbers  of 
the  units  of  all  other  goods.  But  this  is  meaningless,  so  far  as 
a  theory  of  money  is  concerned.  It  abstracts  entirely  from 
the  dijferences  in  salability  ^  of  goods,  on  which  the  theory  of 
money  must  rest.  It  gives  us  no  clue  to  that  part  of  the  value 
of  the  money-article  which  comes  from  its  money-functions. 
(4)  The  theory  has  no  bearing  on  the  problems  of  supply 
and  demand.  Demand-curves  are  curves,  not  of  utility, 
but  of  money-prices.  They  are  concerned,  not  with  a  5_yi- 
tcm  of  ratios  among  goods  in  general,  but  with  the  absolute 
money-prices  of  particular  goods,  one  at  a  time.  The  mod- 
ern demand-curves  and  supply-curves,  representing  the 
demand  and  supply  doctrine  first  made  precise  by  J.  S. 
Mill,'  are  concerned  with  the  money-prices  of  particular 
goods,  and  the  "equation  of  supply  and  demand" — amount 
supplied  and  amount  demanded — gives  an  equilibrium  in 
which  only  one  price  is  determined.  Austrian  theory,  in 
Bohm-Bawerk's  hands,  and  in  the  hands  of  practically  all 
adherents  of  the  Austrian  School,  including  Davenport,* 
has  been  offered  as  really  bearing  on  the  explanation  of 
demand,  and  as  giving  a  psychological  account  and  expla- 
nation of  the  demand-curve.    The  scheme  of  Schumpeter 

'  Sec,  iiijra,  the  chapters  on  "Volume  of  Money  and  Volume  of  Trade," 
and  "The  Functions  of  Money." 

2  IiiJra,  chs.  on  "  ( )rigin  of  Money,"  "  Functions  of  Money,"  and  "  Credit." 
'  Supra,  ch.  on  "Supply  and  Demand." 
*  See  note  at  the  end  of  this  chapter. 


MARGINAL  UTILITY 


95 


has  simply  no  bearing  at  all  on  this  vital  point.  The  equilib- 
rium picture  in  which  all  goods  arc  involved  suppUes  no 
data  from  which  to  construct  any  of  the  magnitudes  alove 
or  below  the  margin  of  the  demand  and  supply-curves  of 
any  given  good.  One  reason  why  this  is  so  will  appear  from 
the  point  made  with  reference  to  "money -prices"  in  the 
preceding  paragraph.  For  Schumpeter's  scheme,  the  signifi- 
cance of  the  article  chosen  as  "money  "  would  be  as  much  a 
problem  as  anything  else,  when  the  conditions  are  laid 
down.  It  would  vary  in  the  process  of  reaching  the  eq''"lib- 
rium.  Its  ratios  with  all  other  things  would,  thus,  fluctuate 
until  the  equilibrium  was  reached.  But,  as  we  have  seen, 
hi  the  chapter  on  "Supply  and  Demand,"  curves  of  supply 
and  demand  must  assume  a  fixed  significance  of  the  money- 
unit.  It  may  be  further  noticed,  as  marking  oflf  Schum- 
peter's scheme  from  supply  and  demand  analysis,  that  in 
Schumpeter's  scheme,  the  individual  is  the  centre  of  inter- 
est, and  his  reactions  toward  all  kinds  of  goods  is  empha- 
sized ;  whereas  in  supply  and  demand  analysis,  the  good — 
one  good — is  the  centre  of  interest,  and  the  price-ofJers 
streaming  toward  it  from  all  kinds  of  individuals  is  empha- 
sized.   The  two  bodies  of  doctrine  are  quite  distinct. 

(5)  The  theory  has  no  bearing  on  the  explanation  of 
entrepreneur  cost — money-outlay,  "opportunity  cost,"  al- 
ternative positive  values,  or  what  not.  It  finds  no  place 
for  the  modern  cost  doctrine.  It  does  not  in  any  way  open 
the  path  to  the  Austrian  theory  of  costs.  Costs,  for  Aus- 
trian theory,  as,  in  general,  for  modern  theory,  are  reflec- 
tions of  demand  for  the  employment  of  the  agents  of  pro- 
duction in  alternative  uses.  Thus,  it  costs  a  great  deal  to 
raise  wheat  in  Illinois,  because  of  the  rival  demand  for  the 
land  to  produce  corn.  Labor  cost?  are  high  in  ordinary 
manufacturing,  because  of  the  rival  demand  for  labor  in 
the  munitions  factories,  etc.    As  Schumpeter's  theory  can 


96 


THE  VALUE  OF  MONEY 


give  no  account  of  the  demand  for  labor  in  the  munitions 
factories,  it  follows  that  it  can  give  no  account  of  the  cost 
of  labor  in  the  other  factories.  Instead,  indeed,  of  giving 
us  the  modern  cost  doctrine,  we  see  Schumpeter's  scheme 
reviving  the  old  real  cost  doctrine,  running  in  terms  of 
sacrifices  in  production.* 

(6)  The  foregoing  paragraph  gives  emphasis  to  the  point 
with  which  we  started,  namely,  that  Schumpeter's  theory 
is  not  a  causal  theory,  but  merely  a  theory  which  gives 
mathematical  relations  in  a  static  picture.  For  the  general 
theory  of  the  Austrians,  this  real  cost  doctrine  is  anathema. 
V'alues  are  positive.  The  emphasis  is  put  on  positive  wants, 
as  causes  which  guide  and  motivate  industry.  The  clue  to 
all  values  is  in  the  values  of  consumption  goods,  which  are 
in  direct  contact  with  the  utilities  which  are  the  source  of 
value.  From  the  values  ol  consumption  goods,  we  derive 
the  values  of  production  goods,  labor,  etc.,  which  are  goods 
of  "second,  third  and  fourth  ranks,^'  and  whose  values  are 
merely  reflected  trom  the  causal  marginal  utilities  of  the 
consumption  goods  they  are  destined  to  create.  None  of 
this  causation  is  brought  into  Schumpeter's  conspectus 
picture.  On  the  contrary,  with  the  bringing  in  of  disutility 
of  production,  we  have  the  doctrine  of  the  earlier  English 
School  revived.  The  equilibrium  picture  is  as  good  a  proof 
of  the  one  theory  as  of  the  other.  If  we  assume  the  utility- 
curves  constant,  and  allow  the  cost-curves  to  vary,  then 
causation  would  be  initiated  by  the  cost-curves.^ 

(7)  Such  an  equilibrium  picture  leaves  untouched  the 

'  Supra,  chapter  on  "Cost  of  Production." 

2  That  this  is  wliolly  alien  to  IJohm-Bawerk's  thought  is  sufficiently  in- 
dicated by  Bohm-Ba' ,erk's  vigorous  criticism  of  Professor  J.  B.  Clark,  in 
"The  Ultimate  Standard  of  X'alue,"  Annals  of  the  American  Academy, 
vol.  V,  pp.  149-209.  It  may  be  noticed  that  Schumpeter  makes  use  of 
Menger's  and  Bohm-Bawerk's  general  doctrine  of  imputation  of  the  value 
of  goods  of  the  first  order  to  goods  of  higher  orders,  without  seeing  that  his 
ecjuilibrium  picture  gives  no  basis  for  such  a  procedure. 


MARGINAL   UTIl-ITY 


07 


vital  question  which  any  theory  must  answer  which  means 
to  be  of  practical  use  in  concrete  situations:  what  arc  the 
real  variables  in  the  situation,  and  what  factors  are  constant? 
What  causes  are  likely  to  produce  changes  in  market  prices? 
The  individual-utility  curves,  which  in  Austrian  theory  arc 
commonly  treated  as  the  only  variables,  except  quantities 
of  goods, — in  the  strict  static  picture  there  are  no  variables 
at  all!— are  really,  when  conceived  of  as  individual,  as 
growing  out  of  the  mental  processes  of  each  individual 
separately,  the  most  constant  factor  in  the  situation.  For, 
on  the  principle  of  the  inertia  of  large  numbers,  each  unit 
of  which  is  moved  by  its  own  peculiar  causes,  changes  in 
the  utility-curves  of  one  man  will  be  offset  by  opposite 
changes  in  the  utility-curves  of  another,  and  so  the  general 
system  will  remain  much  where  it  was.  Of  course,  if  a  rich 
man  changes  his  curve,  a  poor  man's  change  will  not  offset 
it  in  the  market,  but  this  is  to  emphasize  the  distribution  of 
wealth  rather  than  the  utility-curves.  It  is  only  when  you 
get  changes  of  a  sort  that  the  individualistic  psychology, 
and  the  "pure  economic"  explanation  factors,  of  the  Aus- 
trians  find  no  place  for,  that  you  can  predict  a  change  in 
the  general  price-system.  It  is  only  changes  in  fashion  or 
mode,  in  general  business  confidence,'  in  moral  attitude 
toward  this  or  the  other  sort  of  consumption  or  production, 
in  the  distribution  of  wealth,  changes  in  taxes  and  other 
lav/s — causes  of  a  general  social  character — that  you  can 
count  on  to  produce  important  changes  in  values.  Of 
course,  changes  in  the  adequacies  of  supplies  would  be  taken 
account  of  on  either  interpretation. 

(8)  The  scheme  under  consideration  gives  no  value  con- 
cept which  the  economist  can  make  any  particular  use  of. 
It  gives  only  ratios  between  marginal  utilities  in  the  minrl 

'  Cf.  comments  on  Professor  R.  B.  Perry's  view,  in  the  long  note  at  the 
end  of  this  chapter. 


I 


08 


Tin:  VALUE  OF   MONilY 


IM 


of  the  same  individual,  and  abstract  market  ratios.    It 
gives  no  quantitative  value,  which  can  l>e  attributed  to 
goods  as  a  quality,'  a  homogeneous  (luality  of  wealth  by 
means  of  which  diverse  sorts  of  wealth  may  be  compared, 
funded,  etc.     Such  a  concept  is,  however,  necessary  for 
the  economic  analysis,  and  Schumpeter  is  driven  to  creat- 
ing substitutes  for  it  of  various  sorts,  notably  Kaufkrajl 
and  Kapital.    Kaujkrajt.  as  Schumpeter  uses  the  term,  is 
not  derived  from  marginal  utility,  but  is  an  abstraction 
from  the  idea  of  money.     It  is  not  a  quantity  of  money 
alone,  nor  even  of  money  and  credit,  but  is  a  fund  of  "ab- 
stract power."  which  depends  not  ahme  on  the  (juantity  of 
money  and  credit  in  which  it  is  embodied,  but  also  on  the 
prices  of  goods.'    This  Kaufkrajl  is  needed  to  give  the 
causal  "steam,"  the  "motivating  power,"  which  the  social 
value  concept  connotes,  but  which  ratios  in  the  market 
lack.    Similarly.  Kapital  is  conceived  of  as  an  agent,  a 
dynamic  force,  distinguished  from  accumulations  of  con- 
crete productive   instruments,   by   means   of   which    the 
entrepreneur  gets  control  of  land,  labor  and  instrumental 
goods.=*    Other  functions  of   the  quantitative  value  are 
shouldered  on  a  hard -worked  and  unusually  defined  con- 
cept. Krcdit,  which  leads  Schumpeter  into  certain  "here- 
sies" •*  regarding  credit,  w^hich  arc  mostly  harmless  in  them- 
selves, but  which  will  arouse  misunderstanding  and  opposi- 
tion.   "Prater  nccessitatem  entia  non  multiplicanda  sunt,'' 
and  the  social  value  concept,  which  covers  by  inclusion  the 

'  Cf  Bohm-lJawcTk,  Gruitdzw^r,  etc.  (he.  fit.),  pp.  S,  478.  n.;  Snr!al  Valiu; 
ths  2  and  11;  J.  M.  t-lark  uml  H.  M.  Anderson,  Jr..  in  Quarterly  Jour, uil 
of  iiccwmks,  19 1 5-" The  C<.ncci)t  of  Value."  I  may  add  that  this  equihh- 
brium  scheme  is.  in  my  judgment,  «iualiy  useless  as  the  i)asis  of  a  hedonistic 
theory  of  i<rlfar,-,  since  it  is  absolute  amounts  of  utility  that  arc  significant 

there. 

2  Theorie  tier  ivirtselhiftHehen  Entvickhing,  pp.  83-S4. 

'  Loe.  cit.,  ch.  3,  part  ii. 

*  Ibid.,  p.  199- 


MARGINAL   UTILITY 


99 


notion  of  market  ratio — market  ratios  being  ratios  between 
social  values-  and  which  docs  all  the  work  that  Schumpeter 
attributes  to  Kapital  and  Kaufkrafl,  and  most  of  the  new 
work  which  he  attributes  to  Kredit,  is  to  be  preferretl.'  if 
only  on  grounds  of  intellectual  economy.  "Capital"  is 
then  saved  for  more  usual  meanings,  and  economy  in  ter- 
minology is  also  effected.  Schumpeter  also  departs,  as 
shown,  from  the  abstract  market  ratio  notion  in  erecting 
a  causal  theory  of  value,  in  which  "marginal  utility"  is 
used  as  the  equivalent  of  a  quantitative  value,  and  is  traced 
by  the  Austrian  imputation  process  back  to  the  original 
factors  of  production.  He  even  speaks  of  labor  as  having 
"utility,"  whereas  labor,-  unless  used  in  domestic  service, 
has,  not  utility,  but  only  value. 

In  the  marginal  utility  scheme  above  outlined  there  is  no 
place  for  money,  on  the  assumptions  laid  down.  It  is  a 
scheme  of  barter  relations.  The  utilities  which  come  into 
equilibrium  are  not  subjective-exchange- values,  which,  as 
Schumpeter,  with  Wieser,  contends,  are  the  only  subjective 
values  money  has,  but  are  real  subjective  use  values — mar- 
ginal utilities.  The  scheme,  assuming  as  it  does,  perfect 
exchangeability  of  all  goods,  with  infinitesimal  increments 
in  consumption,  has  no  place  for  money.  There  really  is 
no  money  service  to  be  performed.  Schumpeter,  indeed, 
speaks  of  money  as  a  mere  "Schleier,"  which  does  not 
touch  the  essence  of  the  phenomena,  and  such  it  is  on  his 
assumptions.  In  a  similar  situation,  Professor  Irving 
Fisher  gives  up  the  eflort  to  find  a  psychological  explana- 
tion of  the  value  of  money,'  and  offers  the  quantity  theory 


*  For  the  assimilation  of  credit  phenomena  to  the  general  phenomena 
of  value,  by  means  of  the  social  value  doctrine,  sec  iufra  our  section  on 
"Credit."  The  social  value  di)ctrine  is  still  further  generalized  in  the  chap- 
ter on  "The  Reconciliation  of  Sialics  and  Dynamics." 

^  Ibid.,  p.  i(  ,. 

'  Vide  Mathematical  Invcsligalions,  loc.  cit.,  p.  62,  where  Fisher  assumes 


m 


TOO 


THK  VM.ri-   OK   Mt)NEY 


)l 


,  * 

M% 

HI 

1 

w 

'» 

« 

1 

^: 

* 

f 

1 

m  i 


?.  f 


as  a  mechanical  principle,  additional  to  the  psychologic?.! 
barter  scheme.  Schumpcter,  however,  does  lip  service 
-.till  to  tin-  need  for  a  p>ych«iloKital  explainition.  His 
answer  runs  in  Wicscr's  terms  indectl,  he  attributes  i' 
to  VVieser.  The  /'nis  of  money  '  Schumpeter  does  not 
use  Wiescr's  absolute  value  concej)!,  but  lets  his  value  of 
money  run  in  purely  relative  terms  the  price  of  money  in 
goods  depends  on  the  subjective  value  of  money.  This 
subjective  value  of  money  rests  on  the  experience  of  each 
individual  in  making'  purchases  rests  on  the  prices  of 
consumption  goods,  determined  by  the  relation  between 
real  income  and  money  income.    The  circle  is  as  clear  as 

day. 

Ludwig  von  Mises  sees  this  circle,  and  tries  to  avoid  it. 
In  von  Mises  there  seem  to  me  to  be  very  noteworthy 
clarity  and  power.  His  Thcoric  des  Gcldcs  und  der  Um- 
lanJsmilUi  is  an  exceptionally  excellent  book.  Von  Mises 
has  a  very  wide  knowledge  of  the  literature  of  the  theory 
of  money.  He  has  a  keen  insight  into  the  difViculties  in- 
volved. He  recognizes  fully  that,  so  far,  the  utility  school 
has  failed  to  solve  the  problem  (119  120).  His  theory  is 
as  loliows:  Individual  valuations  (93)  constitute  the  basis 
of  the  objective  exchange  value  of  money.  But  while  for 
other  goods,  subjective  use-value  and  subjective  exchange- 
value  are  ditlferent  concepts,  for  money  the  two  coincide, 
and  both  rest  on  the  objective  value  of  money  (94).  This 
seems  to  be  our  old  circle  in  unmistakable  form,  but  Mises 
thinks  he  has  an  escape,  as  will  later  appear.  No  function 
of  money  is  thinkable  which  does  not  rest  on  its  objective 
exchange  value.  The  subjective  value  of  money  rests  on 
the  subjective  use-values  of  the  goods  for  which  it  can  be 

one  price  to  be  unity,  "tu  determine  a  standard  <>f  %-ahic."     Purckasing 
Fo-u.ir  uj  Money,  pp.  174-17.V 
'Z.OC.  (■//.,  pp.  -,2  el  sen- 


MAKUINAI.   UTILITY 


101 


fxthangcd  (95).  Monc>-,  at  the  begiiining  of  its  mont-y- 
functionin},',  must  have  oLjectivt-  exchange  value  from 
«»ther  causes  than  its  money-function,  but  it  can  remain 
vakiable,  even  though  these  causes  fall  away,  exclusivil\- 
through  its  function  as  gener.il  instrument  of  exchange 
(ill).  He  gives  no  argument  in  support  of  this  conten- 
tion, but  refers  with  approval  to  Wieser  {loc.  cit.),  and  to 
Simmel  {Philosophie  Jes  Geldes,  iisff.).  Hence,  the  im- 
portant consequence  that  ia  the  value  of  money  of  to-da>' 
a  historical  component  is  contained.  Herein  is  to  be 
found  a  fundamental  contrast  between  the  value  of  money 
and  the  values  of  other  goods  (i  19-120.)  The  individual 
valuation  of  money  rests  on  the  objective  exchange  value 
of  money  of  yesterday.  This  individual  value  of  money 
is  the  explanation,  on  the  money  side,  of  the  objective 
value  of  money  of  to-day.  Going  back,  step  by  stej). 
you  come  ultimately  to  the  subjective  use-value  of  the 
money-stufT  in  its  non-monetary  employment— a  tem- 
poral regressus.  This  opens  the  way  to  a  theory  of  the 
value  of  money  based  on  marginal  utility.  This  avoids 
the  circle  of  explaining  the  objective  value  of  money  of 
to-day  by  the  subjective  exchange  value  of  money  of  to- 
day, which  in  turn  rests  on  the  contttnporary  objective 
value  of  money. 

I  find  this  particularly  interesting,  since  it  employs  a 
device  which  had  once  suggested  itself  to  me  as  a  means  of 
escape  from  the  Austrian  circle,  but  which  reflection  led 
me  to  abandon.  I  have  discussed  the  whole  matter  in  my 
Social  Value,  and  therefore  venture  a  quotation  from  that 
book.* 

"  How  are  we  to  get  out  of  our  circle:  -  The  value  of  a  good, 

A,  depends,  in  part,  upon  the  value  embodied  in  the  goods. 

B,  C,  and  D,  possessed  by  the  persons  for  whom  good  A 
'  Pp.  132-1 1^.  i  See  Social  Value,  chs.  vi  and  vii. 


I02 


THE  VALUE   OF  MOXF.Y 


PI; 


I 


If 


t  f 


ha?  'utility,'  and  whose  'effective  demand'  is  a  sine  qua 
non  of  A's  value?  The  most  convenient  point  of  departure 
seems  to  be  the  simple  situation  which  Wieser  has  as- 
sumed in  his  Natural  Valued  Here  the  •'artificial'  complica- 
tions due  to  private  property  and  to  the  difference  be- 
tween rich  and  poor  are  gone,  and  only  'marginal  utilitv' 
is  left  as  a  regulator  of  values.  But  what  ibout  value 
in  a  situation  where  there  are  differences  in  purchasing 
power?    Fow  assimilate  the  one  situation  to  !!ie  other? 

"  A  temporal  rcgressus,  back  to  the  first  piece  of  wealth, 
which,  we  might  assume,  depended  for  its  value  solely  upon 
the  facts  of  utility  and  scarcity,  and  the  existence  of  which 
furnished  the  first  'purchasing  power'  that  upset  the 
order  of  'natural  value,'  might  be  interesting,  but  cer- 
tainly would  not  be  convincing.  In  the  first  place,  there 
is  no  unbroken  sequence  of  uninterrupted  economic  causa- 
tion from  that  far  away  hypothetical  day  to  the  present,  in 
the  course  ol  which  that  original  quantity  of  value  has 
exerted  its  influence.  The  present  situation  does  not  differ 
from  Wieser's  situation  simply  in  the  fact  that  some,  more 
provident  than  others,  have  saved  where  others  have 
consumed,  have  been  industrious  where  others  have  been 
idle,  and  so  have  accumulated  a  surplus  of  value,  which, 
used  to  back  their  desires,  makes  the  wants  of  the  indus- 
trious and  provident  count  for  more  than  the  wants  of 
others.  And  even  if  these  v/ere  the  only  differences,  it  is 
to  be  noted  that  private  property  has  somehow  crept  in  in 
the  interval;  for  Wieser's  was  a  communistic  socieiy.  And 
further,  an  emotion  felt  ten  thousand  years  ago  could 
scarcely  have  any  very  direct  or  certain  quantitative  con- 
nection with  value  in  the  market  to-day.  Even  if  there 
had  been  no  'disturbing  factors'  of  a  non-economic  sort, 
the  process  of  'economic  causation'  could  not  have  car- 

'  Bk.  ii,  ch.  vi. 


MARGINAL    UTILITY 


103 


ried  a  value  so  far.  It  is  the  living  emotion  that  counts! 
Values  depend  every  moment  upon  the  force  of  live  minds, 
and  need  to  be  constantly  renewed.  And  there  would  have 
been,  of  course,  many  'non-economic'  disturbances,  wars 
and  robberies,  frauds  and  benevolences,  political  and 
religious  changes — a  host  of  historical  occurrences  affect- 
ing the  weight  of  different  elements  in  society  in  a  way 
that,  by  historical  methods,  it  is  impossible  to  treat  quan- 
titatively.^ 

"  What  is  called  for  is.  not  a  temporal  regressus,  which, 
starting  with  an  hypothesis,  picks  up  abstractions  by  the 
way,  and  tries  to  synthesize  them  into  a  concrete  reality  of 
to-day,  but  rather,  a  logical  analysis  of  existing  psychic 
forces,  which  shall  abstract  from  the  concrete  social  situa- 
tion the  phases  that  are  most  significant.  This  method 
will  not  give  us  the  whole  story  either.    Value  will  not  be 

'  "C/.  Davenport,  Value  and  Distribution,  560.  '  I'"or,  in  truth,  not  merely 
the  distribution  of  the  landed  and  other  instrumental,  income-commanding 
wealth  in  society,  but  also  the  distribution  of  general  purchasing  jxiwer  .  .  . 
are,  at  any  moment  in  society,  to  l>e  explained  ()nl\-  by  a|)peal  to  a  long  and 
complex  history  [italics  mine],  a  distribution  resting,  no  doubt,  in  part  upon 
technological  value  productivity,  past  or  present,  but  in  part  also  tracing 
back  to  bad  institutions  of  ijroperty  rights  and  inheritance,  to  bad  taxation, 
to  class  privileges,  to  stock-exchange  manipulation  .  .  .  and,  as  well,  to  every 
sort  of  vested  right  in  iniquity.  .  .  .  But  there  being  no  apparent  method 
of  bringing  this  class  of  fait s  nithin  the  orderly  sequences  of  economic  hi-^\  -..i; 
shall — perhaps — doncll  to  dismiss  them  from  our  discussion.  .  .  .'  [Italics  are 
mine.]  It  may  lie  qucsticmed  if  the  'orderly  sequence'  is  worth  very  much  if 
it  ignore  facts  so  decisive  as  these!  It  is  precisely  this  sort  of  abstractionism 
which  has  vitiated  so  much  of  value  theory.  Most  economists  slur  over  the 
omissions,  Professor  Daven[x)rt,  seeing  clearly  and  speaking  fnmV'  •  ikes 
the  extent  of  the  abstraction  clear.  We  venture  to  suggest  that  ^  •.-ason 
he  can  find  no  place  for  farts  like  these  within  the  orderly  sequt,  .^  t  his 
economic  theor>'  is  that  he  lacks  an  adequate  sociological  theor\-  at  the 
basis  of  his  economic  theory.  A  historical  regressus  will  not,  of  course,  fit 
in  in  any  logical  manner  with  a  synthetic  theory  which  tries  to  construct 
an  existing  situation  out  of  existing  elements.  Our  plan  of  a  logical  analysis 
of  existing  psychic  forces  makes  it  ixjssiblc  to  treat  these  facts  which  have 
come  to  us  from  the  pa^t,  not  as  facts  of  dilTcrc-nt  nature  from  the  '  utilities' 
with  which  the  value  theorists  have  dealt,  but  rather  as  fluid  psychic  forces, 
of  the  same  nature,  and  in  Va  same  system,  as  those  'utilities.'" 


104 


THE   VALUK   OF   MONEY 


m 


i!=  : 


I  I 


1  i 


completely  explained  by  the  phases  wc  pick  out.  But  then, 
we  shall  be  aware  of  the  fact,  and  we  shall  know  that  the' 
other  phases  are  there,  ready  to  be  picke.  out  as  they  are 
needed  for  further  refinement  of  the  theory,  as  new  prob- 
lems call  for  further  refinement.  And,  indeed,  we  shall  in- 
clude them  in  our  theory,  under  a  lump  name,  namely,  the 
rest  of  the  'presuppositions'  of  value. 

"Our  reason  for  choosing  a  logical  analysis  of  existing 
psychic  forces  instead  of  a  temporal  rci;rcssus— instead, 
even,  of  an  accurate  historical  study  of  the  past— is  a  two- 
fold one:  first,  we  wish  to  coordinate  the  new  factors  we 
are  to  emjihasize  with  factors  already  recognized,  and  to 
emerge  with  a  value  concept  which  shall  serve  the  econo- 
mists in  the  accustomed  way-it  is  illogical  to  mix  a  logical 
analysis  with  a  temporal  regrcssiis.     But,  more  fundamen tal 
than  this  logical  point,  is  this:  the  forces  which  have  his- 
torically begot  a  social  situation  are  not,  necessarily,  the 
.  forces  which  sustain  it.    The  rule  doubtless  is  that  new 
institutions  have  to  win  their  way  against  an  opposition 
which  grows  simply  out  of  the  fact  that  we  are,  through 
mental  inertia,  wedded  to  what  is  old  and  familiar.    We 
resist  the  new  as  the  new.     Even  those  who  are  most  dis- 
posed to  inno\'ate  are  still  conservative,  with  reference  to 
propaganda  that  they  themselves  are  not  concerned  with. 
The  great  mass  of  activities  of  all  men,  even  the  most  pro- 
gressive, are  rooted  in  habit,  and  resist  change.     When, 
however,  a  new  value  has  won  its  way,  has  become  familiar 
and  established,  the  very  forces  which  once  opposed  it  now 
become  its  surest  support.     Or,  waiving  this  unreflecting 
mertia  of  s(Kiety,  as  things  become  actualized  they  are 
seen   in   new   relations.     What,   prior  to  experiment,   we 
thought  might  harm  us,  we  find  beneficial  after  it  has  been 
(ricd,  imd  so  support  it     or  i\v  reverse  may  be  true.     The 
psychic  forces  maintaining  and  controlling  a  social  situa- 


MARGINAL   VTII.ITY 


lo; 


tion,  therefore,  are  not  necessarily  the  ones  which  historic- 
ally brought  it  into  being."  ' 

Since  the  foregoing  was  written,  I  have  found  that  an- 
other theorist.  Professor  Alvin  S.  Johnson,  had  also  given 
consideration  to  the  same  idea,  as  a  means  of  escape  from 
the  Austrian  circle.  Professor  Johnson  refers  to  the  no- 
tion briefly  in  his  review  of  Social  Value  (Atn.  Econ.  Rev., 
June,  1912,  p.  322),  holding  that  the  doctrine  is  logically 
tenable,  though  rejecting  it  on  psychological  grounds. 
*'  The  value  of  a  thing  newly  created  can  be  explained  only 
with  reference  to  values  antecedently  existing.''  That 
there  is  a  continuity  in  the  value  system,  as  in  the  whole 
social-mental  life  of  men,  I  should  be  the  last  to  deny. 
But  it  is  not  the  antecedently  existing  values,  as  ante- 
cedently existing,  that  give  value  to  the  new  piece  of 
wealth.  The  antecedent  values  function  only  as  persist- 
ing, as  contemporary  social  forces.  We  do  not  find  the 
motivating  power  of  existing  values  in  the  ashes  of  burnt 
out  desire  I  It  seems  to  me  very  essential  to  distinguish 
the  two  m.e*'-ods  of  approach  to  the  problem.  It  is  pos- 
sible to  state  a  historical  sequence— if  you  know  it, — show- 
ing how  values  have  historically  come  and  gone.  But  for 
an  equilibrium  picture,  of  the  sort  that  our  price  theory 
demands,  where  there  is  a  mechanical  balancing  of  con- 
temporary factors  (as  in  Marshall's  balls  in  the  bowl  illus- 
tration), such  an  account  is  of  no  use.  E.xisting  social 
forces  have  their  history.  But,  at  a  given  moment,  they 
are  what  they  are,  and  what  they  were  at  a  different  time 
adds  no  ounce  of  weight  to  the  power  they  now  e.xert.  If  a 
quantitative  account  of  value  is  called  for — and  price- 
theory  is  essentially  concerned  with  the  measurement  of 
values — we  must  bring  measure  and  measured  into  con- 

'  Of  couise,  we  do  not  mean  to  question  the  immense  li«ht  which  hisloiy 
throws  u{X)n  the  nature  of  existing  social  forces. 


io6 


THE   VALUE   OF   MONEY 


i 


H 


i 


temporary  balance.  The  hib!  jrical  account  is  one  thing; 
the  cr  ^L-ction  analysis  is  another.  "Static  theory"  is  a 
mccli  al  abstraction  from  the  organic  cross-section 
picture,  which,  by  making  it  superficial,  is  able  to  make  it 
exact. 

It  seems  to  me  that  this  distinction  must  be  kept  clear 
if  progress  in  the  science  is  to  be  made.     At  every  point, 
divergent  conclusions  are  reached  if  the  two  view-points 
are  merged.     The  distinction  between  statics  and  dynamics 
is,  in  a  general  way,  the  same  as  the  distinction  here  made 
between  the  historical  and  the  cross-section  view.     It  is 
no  answer  to  the  Ricardian  theory  of  land-rent  for  Carey 
to  point  out  that  historically,  in  new  countries,  the  uplands 
are  cultivated  first,  and  the  more  fertile  river-valleys  later. 
Ricardo  is  talking  about  statics,  and  Carey  about  dynamics. 
Carey  does  not  answer  Ricardo,  because  he  is  talking  about 
a  different  problem.    The  utility  theorist  especially  has 
no  right  to  leave  the  static  view-point.    All  the  elementary 
laws  on  which  the  utility  theory  is  based  are  static  laws. 
The  law  of  satiety,  of  diminishing  utility,  is  a  static  law, 
and  the  utility  theorists  are  careful  to  point  out  that  it 
holds  only  for  an  individual  at  a  given  time.    It  rests  on 
nerve  fatigue.     Give  the  nerve  time  to  rest,  and  utility 
does  not  sink.    On  the  contrary,  the  dynamic  law  of  wants 
is  that  wants  expand.    As  old  wants  are  satisfied,  new 
wants  arise,  so  that,  in  the  course  of  time,  marginal  utilities 
do  not  sink— the  competition  of  new  wants  forces  up  the 
margins  of  the  old  wants.     Moreover,  with  time,  tastes 
change,  habits  are  formed,  and  the  same  wants  may  grow 
more  intense— as  in  the  case  of  olives  or  whiskey.    All 
this  has  been  seen  by  the  creators  of  the  utility  theory. 
Thus,  Wieser:  "The  want  as  a  whole  of  course  retains  its 
strength  so  long  as  a  man  retains  his  health;  satisfaction 
does  not  weaken  but  rather  stimulates  it,  by  constantly 


MARGINAL   UTILITY 


107 


contributing  to  its  development,  and,  particularly,  by  giv- 
ing rise  to  a  desire  for  variety.  It  is  otherwise  with  the 
separate  sensations  of  the  want.  These  are  narrowly 
limited  both  in  point  of  time  and  in  point  of  matter.  Any- 
one who  has  just  taken  a  certain  quantity  of  food  of  a  cer- 
tain kind  will  not  immediately  have  the  same  strength  of 
desire  for  a  similar  quantity.  Within  any  single  period 
of  want  every  additional  act  of  satisfaction  will  be  estimated 
less  highly  than  a  preceding  one  obtained  from  a  quantity 
of  goods  equal  in  kind  and  amount."  (Natural  Value, 
p.  9.)  A  similar  statement  is  in  Taussig's  Principles  (I, 
124),  "In  such  cases,  however,  the  tastes  of  the  purchasers 
may  be  said  to  have  changed  in  the  interval.  At  any 
given  stage  of  taste  and  popularity,  the  principle  of  dimin- 
ishing utility  will  apply."  Illustrations  could  be  multi- 
plied. 

It  is  true  that  future  marginal  utilities  come  into  the 
utility  theory  scheme,  but  they  come  in,  not  as  future 
utilities,  but  as  "present  worths"  of  future  utilities,  or  as 
"present  anticipated  feelings"  in  Jevons'  phrase^  suffer 
ing  a  discount,  usually,  in  the  process.  But  I  am  not 
aware  of  any  writer  among  the  founders  of  the  utility 
school,  who  has  sought  to  bring  past  utilities  into  the 
scheme.  The  past  is  dead.  Its  effects  persist  in  the 
present  only  in  present  processes.  A  memory  is  a  present 
psychological  fact. 

Consider  further.  Is  it  the  prices  of  yesterday  that  de- 
termine the  subjective  value  of  money  to  an  individual,  if 
the  prices  of  yesterday  are  different  from  the  prices  of 
to-day,  and  the  individual  knows  it?  In  so  far  as  we  have 
the  clear,  intelligent  economic  mind,  seeking  its  interests — 
and  the  marginal  utility  theory  assumes  this  tvpe  of  mind — 
the  tendency  is  to  bring  all  the  factors  in  the  problem  into 
>  Theory  of  Political  Economy,  4th  ed.,  p.  34. 


I* 


■I  . 


! 

i 


io8 


THE   VALUE  OF   MONEY 


the  present.  If  prices  change  slowly,  so  that  the  individual 
can  count  on  essentially  the  same  situation  to-day  that  he 
had  yesterday,  doubtless  he  will  not  take  the  trouble  to 
recast  his  \aluc  system.  There  is  a  tremendous  lot  of 
trouble  in  bringing  about,  in  the  individual's  mind,  the 
rational  equilibration  of  values — trouble  which  the  Austrian 
thecjry  commonly  abstracts  from,  but  which  should  be 
recognized  in  the  analysis,  and  accorded  i*  ■  own  marginal 
significance  in  the  scale.  To  throw  the  emphasis  on  in- 
ertia, however,  and  to  assume  that  men  do  not  readjust 
their  margins  to  meet  changed  conditions,  is  to  depart 
from  the  fundamentals  of  the  Austrian  theory.  If  the 
price-situation  is  a  rapidly  changing  one,  men  do  rapidly 
readjust  their  estimates  of  money.  If  money  is  fluctuating 
rapidly  in  value — as,  say,  during  a  time  when  there  is  de- 
preciated paper  money,  whose  future  depends  on  military 
events,  the  adjustments  may  be  very  rapid  indeed.  I 
quote  the  following  from  the  news  columns  of  the  Nov 
York  Times,  of  April  4.  igr4,  p.  2:  "Jaurez.  Mexico,  Apr. 
3.  -  After  the  hysterical  outbursts  last  night  that  greeted 
the  news  of  the  fall  of  Torreon.  this  city  was  preternat- 
urally  calm  to-day.  .  .  .  The  silent  gentleman  with  the 
dyed  mustache  who  spins  the  marble  at  the  roulette  wheel 
in  the  Jaurez  Monte  Carlo,  conducted  by  Villa's  officers 
for  the  benefit  of  the  rebel  treasury,  seemed  the  only  person 
who  was  not  excited.  When  the  crowd  of  players  suddenly 
deserted  him  ou  the  sound  of  the  bugle  call  of  victory,  he 
gave  the  marble  another  whirl  from  sheer  force  of  habit, 
but  none  returned.  ...  In  an  hour,  however,  play  was 
faster  and  more  furious  than  ever,  for  holders  of  Consti- 
tutionalist money  early  realized  that  their  currency  had 
suddenly  increased  in  value,  and  that  they  were  somewhat 
richer  than  before."  I  do  not  question  the  fact,  however, 
that  men  are  slow  in  making  calculations,  and  that  society 


MARGINAL   UTILITY 


109 


is  often  unconscious  of  changed  conditions,  and  often  re- 
adjusts less  rapidly  than  occasion  requires.  There  is  a 
vast  deal  of  inertia,  of  blind  habit,  of  custom,  etc.  But 
emphasis  on  these  factors  is  not  marginal  utility  theory! 
Factors  like  these  are  emphasized  by  a  functional  psychol- 
ogy, and  by  a  social  psychology— not  by  an  individualistic 
psychology  which  rests  on  the  assumption  of  rational  cal- 
culation. It  is  not  past  utilities  that  explain  present  sub- 
jective values  of  money  when  these  subjective  values  are 
out  of  harmony  with  the  present  market  facts,  but  rather 
present  habits,  present  customs,  present  disinclination  to 
readjust,  etc.  There  is  a  big  difference,  psychologically, 
between  the  mental  processes  through  which  one  arrived 
at  one's  present  state  of  mind,  and  the  present  state  of  mind 
itself.  The  original  "commodity  utility"  of  the  money 
metal,  in  the  far  away  time  before  the  money  use  affected 
its  value,  is  surely  no  longer  a  factor.  Certainly  not  on 
the  basis  of  an  individualistic  psychology  of  the  Austrian 
type.  All  the  individuals  who  experienced  that  original 
utility  are  long  since  dead!  Not  even  memories  of  the 
original  utilities  persist. 

When  writing  the  passage  in  Social  Value,  quoted  above. 
I  did  not  suppose  that  I  was  dealing  with  a  notion  that 
anyone  else  would  ever  take  seriously.  My  purpose  in 
discussing  it  was  chiefly  to  throw  into  sharp  relief  the  con- 
trast between  the  historical  and  the  cross-section  view- 
points, and  to  make  clear  that  my  own  theory  was  based 
on  analysis  of  existing  psychological  forces.  Since  find- 
ing, however,  that  two  writers  for  whose  views  I  have  so 
much  respect  have  independently  developed  the  same 
idea,  and  have  taken  it  seriously,  I  have  felt  it  worth  while 
to  give  it  this  extended  consideration. 

Von  Mises,  like  Wieser,  needs  an  absolute  value  of  money 
in  his  thinking.    He  does  not  call  the  concept  by  that 


r    c 
I   1 


no 


THE  VALtJE  OF  MONEY 


1    1 
I 


i 


*  fl 


< 

^ 


i 
i 
i 

i 

I 


name,  but,  following  Menger '  speaks  of  the  "inner  objec- 
tive value  of  money"  and  the  "outer  objective  value  of 
money."  (Mises,  p.  132.)  The  latter  is  the  purchasing 
power  of  money,  a  relative  concept,  exactly  expressed  in 
the  price-level.  Tj  e  inner  objective  value  of  money  is  de- 
signed to  cover  the  causes  of  changes  in  prices  which  orig- 
inate on  the  money-side  of  the  price  relation  alone.'*  This 
inner  objective  value  of  money  performs  the  same  logical 
function  in  the  theory  of  money  that  the  absolute  social 
value  concept  of  the  present  writer  does,  even  though  the 
psychological  explanation  lying  behind  it  is  very  different. 

Von  Mises  considers  the  quantity  theory  at  length,  not- 
ing a  number  of  defects  in  it,  chief  of  which  is  the  fact  that 
it  has  no  psychological  theory  of  value  behind  it,  that  it 
does  not  account  for  the  existence  of  the  value  of  money,  and 
at  most  gives  a  law  for  changes  in  a  value  whose  existence 
is  taken  for  granted.  The  details  of  this  criticism,  however, 
need  not  be  here  presented.  The  quantity  theory  is  to  be 
treated  in  detail  at  a  later  point  of  our  study. 

The  writer  who  has  most  definitely  stated  the  relation  of 
utility  to  the  functions  of  money,  is  David  ^inley  (Money, 
ch.  viii).  He  would  explain  the  value  of  money,  by  (a)  its 
utility  as  a  commodity,  and  (b)  its  utility  in  the  money- 
employment,  the  employments  reaching  a  marginal  equilib- 
rium. The  utility  of  the  money  metal  in  it^  commodity 
use  calls  for  no  analysis.  But  what  is  meant  by  the  utility 
of  money  as  money?  Where  the  writers  so  far  discussed 
have  denied  that  money  as  money  has  any  utility.  Dean 
Kinley  finds  a  utility  in  the  money-function  itself:  money 
facilitate?  exchange,  and  exchange,  by  transferring  goods 
from  those  who  do  not  need  them  to  those  who  do  need 

•  Art.  "  Geld,"  in  Ilanduorlerhuch  der  Slaatswissensckaften. 
'  Cf.  Helfferich,  Das  Geld,  Leipzig,  1903,  for  the  same  terminology,  pp. 
485-486. 


MARGINAL  UTILITY 


III 


them,  increases  the  utility  of  those  goods.  Money,  as 
money,  thus  produces  utility.'  The  utility  of  money  is  the 
extra  utility  which  comes  into  being  by  virtue  of  its  use, 
as  compared  with  what  would  exist  in  a  state  of  barter. 
The  marginal  utility  of  money  is  the  utility  of  money  in 
the  marginal  exchange — the  exchange  which  would  be 
effected  by  means  of  barter  if  money  were  any  more  diffi- 
cult to  procure.  The  marginal  utility  of  money,  then, 
is  not  the  whole  of  the  marginal  utility  of  the  good  for 
which  it  is  exchanged,  but  rather  is  the  differential  part  of 
that  utility  which  is  created  by  means  of  the  use  of  money 
in  exchange.  The  marginal  utility  of  money,  thus,  appears 
in  separate  services  of  money.  Money  is  a  durable  good, 
which  gives  forth  its  services  bit  by  bit.  The  value  of 
money  is  based  on  these  separate  services,  it  is  "the  cap- 
italized value  of  the  service  rendered  in  the  marginal  ex- 
change." 

This  conception  is,  it  seems  to  me,  much  truer  to  the 
spirit  of  the  general  marginal  utility  theory  than  the 
theories  of  Wieser,  Schumpeter,  or  von  Mises.  If  the 
utility  theory  at  large  were  valid,  the  application  here 
would  be  valid.  To  Dean  Kinley's  conception  of  a  mar- 
ginal utility  of  the  money  service,  I  offer  simply  the  objec- 
tions which  I  offer  to  the  utility  theory  at  large— objec- 
tions indicated  in  what  has  gone  before,  and  in  my  Social 
Value.  The  application  of  the  capitalization  theory  to  the 
value  of  money  I  have  already  discussed  in  a  previous 
chapter,  and  shall  again  consider  in  the  chapter  on  "  The 
Fimctions  of  Money." 

I  conclude  that  the  marginal  utility  theory  has  not 
solved  the  problem  of  the  value  of  money.    The  reason, 


J  Exchange  creates  values.  It  does  not  necessarily  create  utilities.  Wheat 
going  from  a  famine-stricken  part  of  India  to  a  place  where  it  will  sell  for 
higher  prices  does  not  gain  in  utility  thereby. 


II. 


THF   VM.ITE   OF   MONEY 


however,  is  simply  that  it  has  not  solved  the  general  prob- 
lem of  value.  The  marginal  utility  theory,  in  st)  far  as  it 
seeks  to  make  marginal  utility  the  cause  of  value,  is  circular. 
The  efTect  of  a  given  man's  wants  upon  the  value  of  the 
goods  he  wants  depends,  not  on  the  marginal  intensity  of 
those  wants  alone  --a  penniless  prisoner  may  desire  a 
marble  palace  ever  so  intensely  without  affecting  its  value  - 
but  also  upon  the  value  of  the  wealth  possessed  by  the  in- 
dividual who  experiences  the  wants.  But  this  is  to  e.xplain 
value,  not  by  marginal  utility  alone,  but  by  value  as  well  a 
circle.  Or,  if  we  leave  the  standpoint  of  absolute  values, 
and  look  at  the  matter  in  terms  of  prices,  the  same  situa- 
tion presents  itself.  The  price  which  an  individual  is 
willing  to  pay  for  a  good  depends  on  his  income, — which 
commonly  rests  on  prices— and  on  the  prices  he  has  to  pay 
for  other  goods  which  enter  into  his  budget.  His  price- 
offer,  expressive  of  the  marginal  utility  of  a  horse  to  him, 
is  made  with  consideration  of  the  price  of  a  buggy,  of 
harness,  of  feed,  of  the  wages  of  the  servant  who  cares  for 
the  horse,  the  price  of  a  barn,  and  of  the  other  things  that 
the  possession  of  the  horse  involves.  And  not  these  alone: 
less  immediately,  but  still  vitally,  his  whole  budget  enters. 
Higher  prices  for  theatre  tickets  or  for  food  or  for  clothing 
will  reduce  his  price-offer  for  a  horse.  Further,  his  price- 
offer  for  the  horse  will  be  tremendously  influenced  by  his 
opinion  as  to  the  permanent  market  price  of  horses.  He 
will  not  be  willing  to  pay  a  price  for  the  horse  which  he 
cannot  expect  to  get  back  if  he  should  decide  later  to  sell 
the  horse.  The  direct  influence  of  market  price  on  indi- 
vidual demand-price  is  very  great  indeed.  Marginal 
utility  (subjective  use-value)  very  frequently  gives  place 
to  subjective  value-in-exchange  in  the  determination  of  an 
individual's  marginal  demand -price— which  means  that  the 
market  controls  the  individual  instead  of  the  individual 


^  i 


J  >, 


MARGINAL    UTILITY 


"3 


controlling  the  market.  With  sellers,  it  is  generally  sub- 
jective-exchange-value, rather  than  marginal  utility,  that 
determines  supply-price-offer.  The  sellers,  in  so  far  as 
they  are  producers,  have  little  need  for  the  great  mass  of 
their  stocks.  They  wil  sell  them,  rather  than  keep  them, 
at  almost  any  price.  The  reason  they  ask  high  prices  is 
simply  that  they  think  the  market  will  give  them  the  high 
prices.  The  individual  price-offers,  in  the  aggregate  there- 
fore, presuppose  the  whole  market  situation— presuppo.se  a 
general  value  and  price  system  already  fi.xed  and  deter- 
mined. Kach  individual  price  offer  presupposes  many 
other  prices,  though  not,  of  course,  the  whole  market. 
Since,  then,  much  of  the  market  situation  is  assumed  in  the 
determination  of  each  particular  price,  by  the  Austrian 
method,  it  is  obviously  circular  reasoning  to  think  that  the 
determination  of  each  price  separately  by  this  method  will 
supply  data  for  a  summary  of  the  market  situation  as  a 
whole.  In  the  one  form  in  which  the  utility  theory  avoids 
a  circle,— that  presented  by  Schumpeter,  and  discussed  in 
an  earlier  part  of  this  chapter— it  is  not  a  causal  theory. 
Marginal  utility  is  not  a  cause  of  market  prices,  but  rather, 
marginal  utilities  and  market  prices  are  alike  resultants, 
effects,   of  more   fundamental   factors.     No  writer  '   who 


» A  possible  exception  to  this  general  statement  might  be  made 
for  Professor  H.  J.  Davenport,  who  would  insist  that  his  version  of 
the  utility  theory  is  based  on  "relative  marginal  utility."  rather  than 
on  marginal  utility  in  Bohm-Bawerk's  fashion.  No  critic  has  been 
more  merciless  than  he  in  the  criticis-n  of  the  Austrian  confusions 
of  demand-curves  with  utility-curves,  etc.  But  it  is  not  clear  to  me 
that  Professor  Davenport  has  freed  himself  from  the  general  doctrine 
that  he  criticises.  I  am  not  sure  that  he  would  accept  Schumpeter's 
version  of  the  .Austrian  theory  as  correct.  It  may  be  possible  to  read 
Schumpeter's  doctrine  into  chapter  7  of  Davenport's  admirable  Eco- 
nomics of  Enterprise,  but  it  is  not  clear  that  one  could  read  it  in  the 
chapter!   That  individual  price-offer  depends  on  the  marginal  utilities 


^1' i 


i  I 


I   '    ! 


I'!?  i  i  i 


114 


THK   VALUK  OF   MONEY 


has  presented  the  utility  theory  in  this  form  has  tried  to 
apply  it  to  the  value  of  money,  and  even  if  it  could  be  so 
applied,  it  would  not  ^ivc  ;i  causal  explanation  of  the  value 
of  money  in  terms  of  marginal  utility.     In  most  of  the 
of  alternative  gooils,  in  ronii)arison  with  the  marginal  utility  of  the 
Rood  in  question,  Davenport  does  emphasize.     But  the  compliralion 
that  not  merely  the  utilities  of  alterpuive  rckmIs.  hut  also  their  prucs, 
have  to  be  taken  into  account,  and  thai  this  involves  circular  reason- 
ing when  an  elTort  is  made  to  give  a  summary  of  the  whole  system  of 
|)rices  by  means  of  individual  utility  lalculations,  he  does  not.  so 
far  as  1  ran  see.  grapple  with.    He  summarizes  the  thing  on  p.  T04: 
"The  steps,  then,  are  from  (i)  utility  to  (2)  mar'jinal  utility,  thence 
to  (.^)  the  comparison  of  marginal  utilities,  and  tinally  to  (4^  price- 
ofler."    He  takes  no  account  here  of  the  complication  that  the  third 
step  is  in  large  degree  a  comparison,  not  of  marginal  utilities  proper, 
but  rather,  of  "subjective  values  in  exchange."    Yet  just  in  this  lies 
a  vital  dilTiculty  of  utility  theory,  in  so  far  as  it  attempts  to  explain 
causation.     Moreover.  Professor  Davenport  is  seeking  to  explain 
the  causal  relation  of  utility  to  demand,  the  old  ,\ustrian  problem. 
The  explanation  of  demand  is,  indeed,  the  problem  with  which  all 
theories  of  value  must  come  to  terms,  if  they  are  to  be  of  any  use. 
.\s  we  have  seen.  Schumpeter's  schema  has  no  bearing  whatever  on 
the  explanation  of  demand,  or  on  causation  of  any  son.    Schumpeter's 
scheme  leaves  money  out.  and  demand-curves  run  in  money  terms. 
Davenport's    scheme    assumes    money— and    "purchasing    {)Ower." 
(Loc.  cil.,  01 .)    We  have  seen  in  the  chapter  on  "  Supply  and  Demand  " 
that  the  notion  of  demanil  and  supply  involves  money  and  a  fixed 
absolute  value  of  money.    Professt)r  Davenport  is  thus  doubly  as- 
suming value,  the  thing  to  be  explained !    Laws  of  "  relative  marginal 
utility"  developed  on  the  assumption  of  money,  and  in  abstraction 
from  changes  in  the  value  of  money,  are  not  likely  to  be  of  service 
when  the  problem  of  the  value  of  money  itself  is  taken  up.    On  pp. 
05-06.  Davenport  comes  closest  to  Schumpeter's  fioctrine,  saying  that 
"the  total  situation  is  directive  of  each  imiividual  in  it,"  and  that 
there  are  "mutual  reactions  "  auch  that  particular  facts  are  both  ef- 
fectsand  causes,  illustrat  cd  by  the  List  person  who  jumps  on  a  crowfled 
raft— <loes  he  sink  liie  others,  or  do  they  sink  him?    This  recognizes 
the  romplexit  y  of  the  problem,  but  it  is  not  clear  that  it  even  purports 
to  do  more  than  that .   What  is  called  for  is  a  definition  of  the  essential 


MARGINAL   UTIUTY 


"5 


efforts  to  apply  the  utility  tlieory  to  money,  the  circle  be- 
comes so  obvious  that  one  marvels  that  able  theorists 
should  for  a  moment  fail  to  see  it. 

c'.menls  in  that  "total  situation,"  with  prccisic  statement  as  to  what 
is  assumcti  constant  an<l  what  ib  allowwl  to  vary,  an<l  an  analysis  of 
the  "mutual  reactions,"  with  a  starting  |x)int  and  a  terminus  ad 
qucm,—an  equilibrium  in  which  "mutuiil  reactions"  cease  to  trouble 
with  their  endless  circle!  Schumpeter's  schema,  though  meeting 
criticism  on  other  scores,  tloes  meet  this  logical  test,  but  Davenport's 
does  not  appear  to  do  so. 

It  is  interesting  to  note  that  Professor  Alvin  S.  Johnson,  in  his 
review  of  the  Economics  of  Enterprise,  concludes  that  Professor  Daven- 
|)ort,  instead  of  meaning  by  "relative  marginal  utility"  anything 
of  the  sort  that  Schumpeter  has  in  mind  in  his  equilibrium  picture 
of  all  utilities  to  all  individuals,  really  has  an  absolute  value  in  mind. 
{Quarterly  Journal  of  Economics,  May,  1914,  pp.  433-436.)  There  is 
much  in  Professor  Davenport's  book  to  justify  this  interpretation. 

Professor  Davenport's  application  of  "utility"  to  the  problem 
of  the  value  of  money  will  be  found  on  pp.  267- J7 5  of  the  Economics 
of  Enterprise.  The  general  discussion  of  money  and  credit  in  the 
Economics  of  Enterprise  has  been  exceedingly  illuminating  to  me,  and 
my  indebtedness  to  it  will  appear  in  the  present  book. 

Much  of  what  has  been  said  of  Davenport's  "relative  utility" 
theory  may  also  be  said  of  Wicksteed's.  {Common  Sense  of  Polilical 
Economy,  London,  iqio.)  This  is  in  many  ways  a  remarkable  book, 
ciiaracterized  by  excellencies  of  many  different  sorts.  But  it  fails 
to  present  the  utility  theory  in  such  a  way  as  to  avoid  circular  reason- 
ing. Wicksteed  sees  the  confusion  of  utility-curves  with  demand- 
curves,  and  protests  vigorously  and  at  length  against  it.  (£.  g.,  pp. 
147-150.)  He  starts  out  by  assuming  money  and  a  set  of  market 
prices.  His  eariier  chapters  are  given  to  showing  how  the  individual 
adjusts  himself  to  the  market,  bringing  his  "marginal  utilities"  of 
various  goods  into  harmony  with  the  market  prices.  He  recognizes 
that  he  has  made  these  assumptions  (pp.  130-131),  and  that  he  cannot 
use  the  results  thus  achieved  as  an  explanation  of  the  market  prices. 
They  are  "our  goal,  not  our  starting  point."  But  by  pp.  161-162  he 
finds  himself  with  the  "suspicion"  that  nothing  special  or  peculiar 
is  to  be  found  in  the  laws  of  "market  or  current  prices — a  phenome- 
non which  it  is  obviously  impossible  to  regard  as  ultimate,  which 


t  i 


ii6 


THE  VALUE   OF   MONEY 


I 


li 


i  t 


I 


cJemands  explanation,  and  which  we  have  not  yet  explained 

Much  remains  to  be  .ione,  but  we  can  alre^uly  see  that  the  preferences 
of  oadi  individual  h»-lp  to  .k-ternune  the  terms  or  con.Ut.ons  un.ler 
Nvhidi  the  choice  of  other  nu-mbers  ..f  the  community  must  be  exer- 
cised If  you  take  the  individuals  of  tlie  community  two  and  two 
il  is  clear  that  the  marginal  preferences  of  each  <letermine  the  m^ts 
within  which  direct  exchanges  with  the  other  can  be  entertauK-d,  an.l 
we  must  already  have  at  least  a  presc-ntimenl  that  the  coUecUve 
scale  is  the  register  of  the  final  and  precise  •  resultant  of  all  these 
mutually  determining  conditions  and  forces."  .      ,      ,      , 

This  seems  to  forecast  Schumpeter's  doctrine,  but  m  the  develop- 
ment which  follows,  we  do  not  fmd  it.    The  heart  of  h,s  analysis  of 
the  causation  of  prices  is  in  ch.  vi,  on  "  Markets."     1  he  ^  summary 
which  precedes  that  chapter  again  suggests  Schumpeter  s  analysis 
the  notion  of  an  all-embracing  equilibrium.    But  when  we  get  mto 
the  detailed  analyses  of  the  chapter  we  find  nothing  more  than  an 
exceedingly  good  account  of  the  process  by  which  supply  and  de- 
mand of  particular  goods,  considered  separately,  become  equated, 
through  two-sided  competition,  and  under  conditions  of  monopoly. 
Instead  of  -'relative  marginal  utilities,"  we  see  customers  coming  into 
the  market  with  various  money-prices  in  mind,  and  sellers  trying 
out  various  money-prices-not  marginal  utilities,  nor  yet  two  or 
more  marginal  utilities  in  comparison  with  one  another,  but  rather 
money-prices,  which,  in  the  minds  of  the  buyers  may  be  supposed 
to  represent  '-subjective  values  in  exchange."  based  on  both  marginal 
utilities  and  objective  prices  of  other  things  that  enter  into  the  budg- 
et  and  which,  in  the  minds  of  sellers,  represent  estimates  of  the 
prices  which  buvers  may  be  induced  to  pay.     Wicksteed  does  not 
transcend  the  circle.    Finally,  despite  his  caution  to  avoid  the  more 
glaring  forms  of  the  circle,  and  the  confounding  of  demand-curves 
with  utility-curves,  and  of  utility  with  value,  he  does  lapse  into  it  m 
its  completest  form  in  expounding  the  Austrian  <loctrme  of  cost  of 
production.    "The  only  sense,  then,  in  which  cost  of  production  can 
a Ject  the  value  of  one  thing  is  the  sense  in  which  it  is  itself  the  value 
of  another  thing.     Thus  what  has  been  variously  termed  utility 
ophelemitv,  or  desiredness,  is  the  sole  and  ultimate  determinant  o 
aU  exchange  values."    (P.  3Qi.)    Here  is  the  illicit  leap  from  marginal 
demand  price  to  marginal  utility  which  all  uJlity  theorists  make 
sooner  or  later!    It  is  true  that  costs  in  one  place  are  reflections  ot 
demand  elsewhere.    But  it   is   not  true   that  cosU  in  one  place 


MARGINAL   UTILITY 


117 


have   any   definite   quantitative    relation    to    utilities    in   another 
place! 

When  Wicksteed  comes  to  discuss  the  value  of  money,  he  makes 
slight  use  of  the  notion  of  abstract  ratios  among  relative  utilities, 
and  employs  a  concept  which  he  has  nowhere  vindicated  or  explained: 
the  value  of  money,  as  distinct  from  the  reciprocal  of  the  price-level, 
rcating  the  value  of  money  as  something  which  can  be  directly  influ- 
enced by  sinister  rumors  affecting  the  credit  of  the  Government,  and 
wnich  can  be  an  independent  cause  affecting  velocity  of  circulation, 
and  the  amount  of  trade  done  by  means  of  money.  Loc.  cit.,  p.  623. 
See  infra,  our  chapter  on  "Velocity  of  Circulation." 

The  only  writers  ^  know  at  first  hand  who  have  really  thought  the 
thing  through,  and  avoided  the  circle  in  for-.,  are  Schumpeter  and 
Irving  Fisher.  {Mathematical  Investigations  in  the  Theory  of  Value 
and  Prices,  Trans.  Conn.  Acad,  of  Arts  and  Sciences,  1892.  See  biblio- 
graphical note,  supra,  in  this  chapter.)  I  have  given  an  exposition 
of  Schumpeter,  rather  than  Fisher,  because  the  former  has  put  the 
doctrine  in  non-mathematical  form.  In  the  text  I  have  indicated 
the  limitations  of  their  doctrine.  Fisher  definitely  avows  the  im- 
possibility of  applying  the  doctrine  to  the  problem  of  the  value  of 
money.  Purchasing  Power  of  Money,  p.  174.  Schumpeter  doesn't 
apply  it  to  money,  and  when  he  tries  to  work  out  a  utility  doctrine 
of  money,  he  lapses  into  the  Austrian  circle  in  a  very  obvious  form. 
In  later  writings,  Fisher  also  seems  to  forget  the  limitations  imposed 
on  utility  theory  in  his  earlier  essay.  In  his  Elementary  Principles, 
ed.  1912,  Fis'  ?r  lists  (pp.  408-409)  a  great  multitude  of  factors  that 
might  affect  the  price  of  pig  iron,  and  then  says:  "Back  of  these 
causes  lie  other  causes,  multiplying  endlessly  as  we  proceed  backward. 
But  if  we  trace  back  all  these  causes  to  their  utmost  limits,  they  will 
all  resolve  themselves  into  changes  in  the  marginal  desirability  or 
undesirability  of  satisfactions  and  of  efforts,  respectively,  at  dif- 
ferent points  of  time,  rnd  in  the  marginal  rate  of  impatience  as  be- 
tween any  one  year  and  the  ne.\t."  Here  these  marginal  psychic 
magnitudes,  which  in  the  earlier  essay  appeared  merely  as  surface 
phenomena,  resultants  of  a  total  situation,  proportional  to  prices, 
causes  of  nothing,  merely  symptoms  of  a  completed  equilibrium,  are 
erected  into  atomic  vera  causa,  the  ultimate  ultimates! 

It  is  interesting  to  contrast  this  with  a  yet  more  recent  state- 
ment by  a  philosopher  who  has  undertaken  a  defence  of  the  utility 
theory  of  economic  value,  Professor  R.  B.  Perry,  in  the  Quarterly 


i 


i\ 


ii8 


THE  VALUE  OF  MONEY 


Journal  of  Economics,  for  May,  1916.  Considering  the  contentions 
of  the  present  writer  that  many  general  social  causes,  in  addition 
to  the  individual  utilities  concerned  with  consumption,  are  needed 
to  explain  changes  in  the  values  of  goods,  such  as  changes  in  fashion, 
mode,  in  general  business  confidence,  in  moral  attitude  toward  dif- 
ferent sorts  of  consumption,  in  the  distribution  of  wealth,  in  taxes 
and  other  laws,  Professor  Perry  says:  "If  the  Austrian  School  has 
neglected  this,  then  it  needs  to  be  corrected.  But  the  essential 
contention  of  that  school  remains,  so  far  as  I  can  see,  unaltered;  in 
that  these  changes  work  through  individuals  and  have  their  point  of 
application  in  a  more  or  less  rational  comparison  of  needs  made  by  the 
individual  buyer  or  seller.  Whatever  affects  these  individual  schedules 
on  a  sufficiently  large  scale  will  affect  prices.  But  to  ignore  the  in- 
dividual channels  through  which  these  forces  pass,  is  elliptical." 
(Pp.  469-470.  Italics  mine.)  Now  I  call  attention  to  several  points 
in  the  foregoing.  First,  I  would  contrast  it  with  the  doctrine  quoted 
from  Professor  Fisher's  Elementary  Principles.  Where  Fisher  puts 
the  utilities  far  back  in  the  realm  of  ultimate  causation,  making  them 
the  source  from  which  spring  all  the  proximate  social  causes  which 
might  affect  the  price  of  pig  iron  (such  as  "a  trade  war,"  "a  change 
in  fashion,"  a  "change  in  incomes,"  "decreasing  foresight,"  etc., 
loc.  cit.,  p.  409),  Professor  Perry  would  make  individual  •  ility  sched- 
ules the  final  focal  point,  toward  which  converge,  and  through  which 
pass,  all  the  causal  forces,  however  richly  explained  by  antecedent 
social  factors,  which  affect  prices.  The  utility  theory  of  value  means 
all  things  to  all  men! 

But  a  second  point  with  reference  to  Professor  Perry's  doctrine. 
It  is  perfectly  true  that  all  social  activit.-es  are  the  work  of  itidividuals. 
Society  is  nothing  apart  from  the  individuals  vno  make  it  up.  To 
think  of  society  and  the  individual  as  separate  and  antithetical  is  a 
fallacy  which  I  have  criticised  in  detail  in  Part  III  of  Social  Value. 
The  social  value  theory  does  not  mean  that  there  are  social  forces 
which  do  not  run  through  individual  channels.  This  is  not  to  accept 
the  notion  that  individuals  are  really,  in  their  psychical  nature,  iso- 
lated monads,  however.  There  is  a  functional  unity  of  individual 
minds,  and  no  individual  can  be  understood  in  abstraction  from  so- 
ciety. But  this  view  is  as  old  as  Aristotle.  I  have  not  contended 
that  prices  can  change  apart  from  the  mental  activities  of  individual 
men,  working  upon  one  another.  So  far  there  may  be  no  issue  with 
Professor  Perry. 


IIARGINAL  UTILITY 


119 


But  there  is  a  big  issue  when  he  contends  that  all  the  causation 
is  focussed  in  individual  utility  schedules,  and  in  a  more  or  less  rational 
comparison  of  needs  made  by  the  individual  buyer  and  seller.  This  is 
demonstrably  erroneous.  Let  us  assume,  for  example,  that  utility  sched- 
ules of  every  individual  New  Yorker  remain  unchanged,  but  that, 
through  a  change  in  the  law  (the  work  of  individual  men,  under  the 
influence  of  their  own  individual  emotions  and  ideas,  of,  say,  ethical 
character),  incomes  in  New  York  City  are  equalized.  Hold  rigidly 
to  the  assumption  that  there  are  no  changes  in  utility  schedules. 
Will  there  not  be,  none  the  less,  a  radical  readjustment  of  prices? 
Will  not  the  prices  of  Riverside  palaces  and  steam  yachts  smk  and 
the  prices  of  things  which  the  poor  esteem  rise?  The  utility-curves 
of  the  erstwhile  rich,  assumed  to  remain  unchanged,  no  longer  count 
for  so  much  as  before  in  the  market.  The  rich  cannot  go  so  far  down 
their  curves  in  the  consumption  process  as  before.  The  poor,  or  those 
who  had  been  poorest,  now  count  for  more  in  the  market.  They  can 
lower  their  margins.  In  other  words,  the  forces  affecting  the  dis- 
tribution of  wealth,  in  so  far  as  they  are  legal  and  moral  in  character, 
at  least,  may  affect  the  price-situation,  w/Z/wm/  altering  utility  schedules. 
Some  social  factors,  as  changes  in  mode  and  fashion,  will  work  through 
the  utility  schedules,  but  others  will  not.  One  big  variable  affecting 
prices  which  need  not,  in  idea,  at  least,  affect  utility  schedules  at  all, 
and  whose  main  influence  is  anyhow  not  directed  through  them,  is 
the  volume  of  business  confidence.  This  factor  we  shall  analyze  in 
our  discussion  of  credit,  infra.  Professor  Perry  thus  escapes  only 
part  of  the  criticism  which  we  have  made  {Social  Value,  pp.  45  and 
56)  of  the  Austrian  theory:  (i)  that  it  abstracts  the  individual  from 
his  vital  contacts  with  other  individuals,  and  (2)  that,  within  the 
individual  mind  thus  abstracted,  the  Austrians  make  a  further  ab- 
straction, taking  as  relevant  only  the  interests  concerned  with  con- 
sumption of  economic  goods,  summed  up  in  the  utility  schedules.  The 
second  criticism  applies  to  Professor  Perry  as  well.  Men's  total  in- 
terests are  not  summed  up  in  utility  schedu'es,  and  do  not  affect 
prices  exclusively  via  utility  schedules. 

It  may  be  noticed,  also,  with  reference  to  Professor  Perry's  dis- 
cussion that  he  has  misconstrued  the  .\ustrian  theorj'  in  conceiving 
it  as  an  analysis  of  an  historical  process,  with  a  beginning 
and  an  end,  instead  of  a  static  picture,  in  which  preexisting  in- 
dividual factors  come  into  equilibrium.  (Loc.  cit.,  475.)  He  seeks 
thus  to  avoid  the  Austrian  circle,  but  as  we  have  shown  in  the  dis- 


I20 


THE  VALUE  OF  MONEY 


I  ' 

!    i 


cussion  of  von  Mises  in  the  text,  this  way  is  not  open  to  the  Aus- 
trians. 

Able  and  penetrating  though  Professor  Perry's  discussion  is,  on 
the  psychological  side,  it  fails,  I  think,  to  take  adequate  account  of 
the  complexities  wdth  which  the  economist  and  sociologist  must 
deal. 

In  general,  I  find  no  version  of  the  utility  theory  of  value  which  is 
defensible,  and,  above  all,  no  effort  to  apply  it  to  the  value  of  money 
which  has  met  with  success. 


» 


i 


PART  II.  THE  QUANTITY  THEORY 


CHAPTER  VI 

THE    QUANTITY    THEORY    OF    PRICES.     INTRO- 
DUCTION 

The  quantity  theor/,in  its  usual  formulations,  is  a  theory, 
not  of  the  value  of  money,  in  the  absolute  sense  of  value, 
but  of  the  general  price-level,  the  average  price  of  goods 
exchanged  for  money.    It  is  not  a  psychological  theory. 
It  does  not  deal  with  psychological  quantities,  or  psycholog- 
ical forces.    It  is  a  mechanical  theory,  concerned  simply 
with  quantities,  and  the  relations  between  them.     The 
essence  of  the  quantity  theory  comes  out  in  the  following 
brief  statement:  given  a  number  of  units  of  money;  given 
a  number  of  units  of  goods  to  be  exchanged;  assume  these 
two  numbers  to  be  independent  ^  of  each  other;  assume  all 
the  goods  to  be  exchanged  for  all  the  money;  then  the  aver- 
age price  will  be  a  simple  function  of  the  quantities  of  goods 
and  of  money  respectively,  such  that  an  increase  in  the 
amount  of  money  will  increase  the  average  price  per  unit  of 
goods   proportionately,    if   goods   remain   unchanged   in 
amount,  or  an  increase  in  goods  will  lower  the  nrice  per  unit 
proportionately,  money  being  assumed  to  remain  unchanged 
in  amount.    The  qualification  is  conunonly  add'id  that  if 
goods  have  to  be  exchanged  more  than  once,  the  effect  is 
the  same  on  prices  as  if  there  were  an  added  number  of  goods 
equal  to  the  added  number  of  exchanges,  and  that  if  money 
is  used  more  than  once  in  exchanging  a  given  number  of 
goods,  the  effect  is  the  same  as  if  there  were  proportionately 
more  money.    Both  quantity  of  goods  and  quantity  of 
money  are  conmioniy  defined  as  actual  quantity  mui- 
»  Vide  Taussig,  Principles,  I,  432- 
133 


124 


THE  VALUE  OF  MONEY 


M 


i! 


tiplied  by  "rapidity  of  circulation."  Rapidity  of  circula- 
tion, however,  for  both  money  and  goods,  is  commonly 
thought  of  as  a  constant,  so  that  the  original  formula 
remains  unaffected  by  the  qualification,  so  far  as  a  predic- 
tion as  to  the  effect  of  increase  or  decrease  of  money  or  goods 
on  prices  is  concerned.  Involved  in  the  quantity  theory, 
and  explicitly  stated  by  many  writers,  is  the  doctrine  that 
the  substance  of  which  money  is  made  is  irrelevant,  that  it 
is  the  number,  and  not  the  quality  or  size  of  the  money- 
units  that  counts.  "In  short,  the  quantity  theory  asserts 
that  (provided  velocity  of  circulation  and  volume  of  trade 
are  unchanged)  if  we  increase  the  number  of  dollars,  whether 
by  renaming  coins,  or  by  debasing  coins,  or  by  increasing 
coinage,  or  by  any  other  means,  prices  will  be  increased  in 
the  same  proportion.  It  is  the  number,  and  not  the  weight, 
that  is  essential.  This  fact  needs  great  emphasis.  It  is  a 
fact  which  differentiates  money  from  all  other  goods  and 
explains  the  peculiar  manner  in  which  its  purchasing  power 
is  related  to  other  goods.  Sugar,  for  instance,  has  a  specific 
desirability  dependent  on  its  quantity  in  pounds.  Money 
has  no  such  quality.  The  value  of  sugar  depends  on  its 
actual  quantity.  If  the  quantity  of  sugar  is  changed  from 
1,000,000  pounds  to  1,000,000  hundredweight,  it  does  not 
follow  that  a  hundredweight  will  have  the  value  previously 
possessed  by  a  pound.  But  if  money  in  circulation  is 
changed  from  1,000,000  units  of  one  weight  to  1,000,000 
units  of  another  weight,  the  value  of  each  unit  will  remain 
unchanged."  (Irving  Fisher,  Purchasing  Power  of  Money, 
pp.  31-32.)  To  the  same  effect  is  Nicholson's  exposition, 
in  which  the  money  is  assumed  to  consist  of  dodo-bones, 
the  most  useless  substance  that  Nicholson  could  thing  of. 
For  the  quantity  theory,  prices  are  determined  by  the 
numbers  of  goods  and  dollars  that  are  to  be  exchanged  for 
one  another,  and  not  by  the  values  of  the  goods  and  dollars; 


THE  QUANTITY  THEORY  OF  PRICES 


I^S 


— indeed,  for  the  quantity  theory,  "value"  commonly  has 
no  meaning  apart  from  the  prices  which  are  supjwsed  to  be 
adequately  explained  by  the  mechanical  relations  of  nimi- 
bers. 

In  the  critical  study  which  follows,  virtually  every  doc- 
trine and  every  assumption  of  this  preliminary  statement 
will  be  challenged.  I  shall  deny,  first,  that  the  quantity  of 
goods  to  be  exchanged  and  the  quantity  of  money  to  be 
exchanged  for  the  goods,  are  independent  quantities,  main- 
taining, rather,  that  an  increase  in  either  of  them  tends 
normally  to  be  accompanied  by  an  increase  in  the  other. 
Quantity  of  goods  and  quantity  of  money  exchanged  are  not 
simple  physical  stocks,  given  data.  Rather,  they  are  conse- 
quences of  human  choices  and  human  relationships,  and 
vary  from  a  large  number  of  highly  complex  psychological 
causes,  many  of  which  are  common  to  both.  I  shall  deny, 
second,  that  "rapidity  of  circulation,"  either  of  goods  or 
of  money,  is  a  simple  constant,  independent  of  quantity  of 
goods  or  of  quantity  of  money.  I  shall  maintain,  rather, 
that  rapidity  of  circulation  of  money  is  a  phenomenon 
which  calls  for  psychological  explanation:  that  the  rapidity 
of  money  really  means  the  activities  of  men;  that  these  ac- 
tivities are  complex,  and  obey  no  simple  law;  that  instead 
of  being  an  independent  factor,  constant,  in  the  situation, 
the  rapidity  of  circulation  of  money  is  bound  up  with  the 
quantity  of  money,  the  quantity  of  goods  to  be  exchanged, 
the  rapidity  of  circulation  of  goods,  and  the  prices  of  the 
goods,  and  that  the  rapidity  of  circulation  of  goods  is  like- 
wise causally  dependent  on  the  factors  named — or  better, 
on  the  causes  which  control  them;  that  rapidity  of  circula- 
tion, whether  of  money  or  of  goods,  is  not  a  causal  factor 
independent  of  prices,  but  rather  in  part  depends  on  prices. 
In  the  third  place,  I  deny  the  doctrine  that  the  question  as 
to  what  the  money-unit  is  made  of  is  irrelevant.    On  the 


126 


THE   VALUE   OF  MONEY 


contrary,  I  shall  maintain  that  the  quality  of  money,  rather 
than  its  quantity,  is  the  determining  factor.     I  shall  not 
maintain  that  only  money  made  of  or  redeemable  in  valua- 
ble bullion  can  circulate,  nor  shall  I  maintain  that  the  value 
of  money  depends  wholly  on  the  value  of  its  bullion  content 
when  money  is  made  of  valuable  metal.    I  recognize  that 
value  can  come  from  other  sources.    But  I  shall  maintain 
that  value  from  some  source  other  than  the  monetary  em- 
ployment is  an  essential  precondition  of  the  monetary 
employment,  even  though  recognizing  that  that  monetary 
employment  may,  in  a  way  later  to  be  analyzed,  add  to 
the  original  value  of  the  money.    The  doctrine  that  only 
physical  quantities,  or  abstract  numbers,  of  goods  are  rel- 
evant I  shall  challenge  especially,  maintaining,  on  the 
contrary,  that  the  psychological  significances,  the  values, 
of  goods  arc  the  really  important  thing,  so  that  an  increase 
in  the  number  of  one  sort  of  goods  may  have  a  very  differ- 
ent effect  on  the  average  of  prices  from  an  increase  of  the 
same  number  of  units  of  some  other  good,  and  so  that  an 
increase  in  the  number  of  goods  exchanged  under  one  set 
of  conditions  may  have  a  very  different  effect  on  prices— 
or  may  be  accompanied  by  a  very  different  movement  in 
prices,  for  the  question  of  causal  relations  is  a  complicated 
one — from  the  change  in  prices  that  might  accompany  the 
same  increase  in  the  amount  exchanged  of  same  goods 
under  other  circumstances.     Finally,  the  doctrine  of  the 
quantity  theory  that  the  price-level  is  a  passive  result  of 
the  other  factors  named:  quantities  of  goods  and  money, 
and  their  respective  velocities;  that  prices  cannot  initiate 
a  change  in  the  situation,  will  also  be  challenged.    I  shall 
undertake  to  show  that  the  first  change  in  the  situation 
may  appear  in  prices  themselves,  and  that  the  quantities 
of  goods  exchanged,  and  of  money,  and  their  velocities, 
may  then  be  altered  to  correspond  with  the  change  in  prices. 


THE   QUANTITY  THEORY  OF   PRICES 


127 


I  shall  further  maintain,  as  against  the  whole  spirit  of 
the  quantity  theory,  that  it  does  not  seize  hold  of  essentials 
in  the  causes  lying  behind  prices.    I  shall  contend  that 
the  factors  with  which  it  deals,  instead  of  being  independent 
foci  to  which  converge  the  causes  governing  the  price-level, 
and  through  which  causation  flows  in  one  direction,  are 
really  not  true  "factors"  at  all,  but  rather  are  blanket 
names  for  highly  complex  and  heterogeneous  groups  of 
facts  concerning  which  few  general  statements  are  possible. 
Quantity  of  goods  exchanged,  for  example,  may  be  in  some 
of  its  parts  caused  by  rising  prices,  in  others  of  its  parts  may 
be  causing  falling  prices  and  is  chiefly  caused  hy  fluctuating 
prices.    The  net  change  in  prices  in  this  case  is  not  the 
result  of  any  one  movement  from  "quantity  of  goods" 
as  a  whole.    Changes  in  the  price-level  are  not  one  result, 
but  rather,  are  the  mathematician's  average  of  many 
changes,  due  to  a  host  of  causes,  in  many  individual  prices. 
The  quantity  theory  is  an  effort  to  simplify  phenomena 
highly  complex.    Of  course,  the  simplification  of  complex 
phenomena  in  thought  is  a  laudable  scientific  goal,  but  when 
the  simplification  goes  so  far  as  to  group  things  only  super- 
ficially related,  and  to  leave  out  the  really  vital  elements, 
it  is  worthless.    Value  theory,  with  all  the  value  left  out, 
is  like  Hamlet  with  no  actor  for  the  title  r61e.    Simplifica- 
tion in  the  explanation  of  general  prices  has  gone  as  far  as 
we  can  legitimately  take  it  when  we  seek  to  summarize  all 
the  factors  involved  in  the/oa  of,  on  the  one  hand,  the  value 
of  money,  and,  on  the  other  hand,  the  values  of  the  partic- 
ular goods.    The  general  price-level  is  an  average  of  many 
concrete  prices.    Each  of  these  individual  prices  has  a  con- 
crete causal  explanation.    The  general  price-level  has,  not 
a  few  simple  causes,  but  an  infinite  host  of  causes.    Indeed, 
the  general  price-level  has  no  real  existence.    It  is  a  con- 
venient mathematical  concept,  by  means  of  which  we  may 


138 


THE   \  \HK   OF  MONFY 


summarize  thv  mailtitiuk  of  conrrr!'.'  huts.  It  i-^  useful  as 
a  (kvice  ftir  mca>urinji  changt's  in  thi'  value  of  money,  on 
the  arvsuTJ»|)tioM  thai  changes  in  llu-  values  of  goo<is  neu- 
tralize one  another.  Tiiis  assumiuion  is  never  strictly  true, 
and  often  •>  demonstrably  faU  .  The  general  price-level 
is  neither  a  cause  nor  a  result  Particular  prices,  in  general, 
are  results  of  two  causes,  tamely,  the  value  of  money  and 
the  value  of  the  uockI  in  question,  and  particular  prices  may 
then  become  causes,  changing  the  ciuantit;.  of  money  in- 
volved in  a  given  set  of  exchanges.  Neither  quantity  of 
monev.  nar  quantity  of  goods  e.xchangtxi,  nor  rapidity  of 
circulatifm.  mir  general  price-level  is  a  simple,  homogeneous 
quantity    ibeying  definite  laws. 

I  shai]  ulsi)  undertake  to  show  that  in  many  important 
cases  the  (luanlity  theory  leads  to  conclusions  regarding 
the  price-level  which  contradict  other  laws  of  prices,  notably 
the  capitalization  ineory,  the  cost  of  production  doctrine, 
and  the  law  i)f  supply  and  demand.  I  have  previously 
pointed  out  that  these  three  doctrines  are  inapplicable 
to  the  problem  of  the  value  of  money  itself.  On  the  assump- 
tion of  a  value  of  money,  however,— using  value  in  the  ab- 
solute sense  the\  are  applicable  to  the  problem  of  prices, 
and,  since  the  price-level  Is  merely  an  average  of  particular 
prices,  they  should  be  applicable  to  the  problem  of  the 
price-level  also.  It  will  be  shown,  in  the  course  of  the  criti- 
cism which  follows,  first  that  the  quantity  theory  contra- 
dicts each  of  these  doctrines,  in  certain  situations,  and  sec- 
ond, that  in  these  cases,  the  conclusions  based  on  the  cost 
theory,  the  supi)ly  and  demand  theory,  and  the  cai^itali- 
zation  theory  are  right,  and  the  conclusivins  based  on  the 
quantity  theory  are  wrong.  It  has  been  maintained  by 
certain  writers,  as  Knut  WickselP  and  Irving  Fisher,-  that 

'  "Der  Bankzins  als  Regulator  der  Waarenpreise,"  Conr.^d's  Jahrbikhir, 
jggy  -'  Loc.  cit.,  ch.  8. 


TIIF.   Q^^\NTIrY    TUKORY   OF    PRU'F.S 


120 


cost  of  prfxluction  and  supply  md  demand  an*  inapplicable 
to  the  prohletn  of  the  general  priie-level.  I  shall  maintain 
the  contrary,  holdinK  that  while  these  doctrines  are  inappli- 
cable to  the  problem  of  the  value  of  money,  they  arc  applica- 
ble to  the  problem  of  general  prices,  on  the  assumption  of 
a  fixed  value  of  money.  By  the  value  of  money  I  mean  its 
absolute  '  value,  and  not-  what  the  quantity  theorists 
commonly  mean  its  "purchasing  power,"  or  the  "recipro- 
cal of  the  price-level." 

I  shall  undertake  to  show  that  no  sound  conclusion 
reached  on  the  basis  of  quantity  theory  reasoning  is  the 
peculiar  proiMJrty  of  the  quantity  theory  school;  that  every 
valid  conclusion  which  nay  be  based  on  the  quantity  theory 
may  also  be  deduced  from  the  theory  maintained  in  this 
book,  and,  indeed,  that  most  of  them  may  be  deduced  from 
several  other  theories  of  money,  notably  the  commodity 
or  bullionist  theor\'.  I  shall  show  a  number  of  false  and 
misleading  doctrines  which  logically  spring  from  the  quan- 
tity theory,  and  shall  undertake  to  show  that  the  quantity 
theory  fails  to  give  an  adequate  basis  for  several  impor- 
tant parts  of  the  theory  of  money,  among  them  Gresham's 
Law,  the  theory  of  international  gold  movements,  and  the 
theory-  of  elastic  bank-notes  and  deposit-currency. 

So  much  for  the  theses  to  be  maintained.  The  detailed 
proof  of  these  contention  will  best  be  given  in  connection 
with  a  critical  account  of  various  versions  of  quantity 
theory  doctrine.  Attention  will  be  given  in  this  summary 
to  the  expositions  of  Nicholson,  Mill,  Taussig,  and  Kem- 
merer,  and  very  special  attention  to  I.  Fisher,  though 
some  other  writers  will  also  be  taken  into  account. 

» Cf.  ch.  on  "  Leonomic  \'alue." 


i 


CHAPTER  VII 

DODO-BONES 

Must  money  have  value  from  some  source  outside  its 
money-functions?    It  is  a  part  of  the  quantity  theory  that 
this  is  unnecessary.     I  have  cited,  in  the  preceding  chapter, 
Irving  Fisher  and  J.  S.  Nicholson  to  this  effect.    Nichol- 
son's statement  is  interesting  and  picturesque,  exhibiting 
the  quantity  theory  in  all  the  nakedness  of  its  poverty,  and 
I  shall  present  it  at  some  length.     "For  simplicity,"  to 
isolate  his  phenomenon,  he  assumes  a  h>pothetical  market, 
in  which  the  following  conditions  obtain:  (i)  No  exchanges 
are  to  be  made  unless  money  (which  he  assumes  to  consist 
of  counters  of  a  certain  size  made  of  dodo-b     "s)  actually 
passes  from  hand  to  hand.     No  credit  or  barter.     (2)  The 
money  is  to  be  regarded  as  of  no  use  whatever  except  i  > 
effect  exchanges,  so  that  it  will  not  be  withheld  for  hoard- 
ing, i.  e.,  will  be  actually  in  circulation.     (3)  There  are  ten 
traders  in  the  market,  each  with  one  kind  of  commodity 
and  no  money,  and  one  trader  with  all  the  money  (one 
hundred  pieces),  and  no  commodities.    Further,  let  this 
moneyed  man  put  an  equal  estimation  on  all  the  commod- 
ities.    Now  let  the  market  be  opened  according  to  the  rules 
laid  down;  then  all  the  money  will  be  offered  against  all  the 
goods,  and,  ever>'  article  being  assumed  of  equal  value, 
the  price  given  for  each  article  will  be  ten  pieces,  and  the 
general  level  of  prices  will  be  ten.     It  is  perfectly  clear 
that,  under  these  sujjpositions,  if  the  amount  of  money 
had  been  one  thousand  pieces,  the  price-level  would  have 
been  one  hundred  per  article,  etc.     Under  these  very  rigid 
assumptions,  then,  it  is  obvious  that  the  value  of  money 

130 


DODO-BONES 


131 


varies  exactly  and  inversely  with  the  amount  put  into 
circulation.— The  rapidity  of  circulation  he  regards  as 
coordinate,  in  fixing  the  price-level,  with  the  volume  of 
money.  To  illustrate  this,  he  assumes  again  his  hypo- 
thetical market,  and  "dodo-bones,"  assuming  as  before 
that  one  merchant  has  aU  the  money  (one  hundred  pieces), 
and  that  ten  have  commodities  of  equal  value.  Instead, 
however,  of  the  merchant  with  the  money  desiring  all  the 
commodities  equally,  he  is  made  to  desire  only  the  wnole 
of  that  of  trader  one,  who  in  turn  desires  the  whole  of 
number  two's  stock;  and  so  on  to  the  ninth  merchant,  who 
wants  the  commodity  of  number  ten,  who  wants  the  dodo- 
bones.  In  this  case,  each  article  will  be  excJianged  only 
once,  as  formerly,  but  the  money  will  change  hands  ten 
times,  and  the  price  of  each  article  will  be  one  hundred  in- 
stead of  ten.  "We  now  see  that,  under  these  circiun- 
stances,  with  the  same  quantity  of  money,  and  the  same 
volume  of  transactions,  the  level  of  prices  is  ten  times  as 
great  as  before,  and  the  reason  is  that  every  piece  of  money 
is  used  ten  times  instead  of  once."  Whence  he  concludes: 
"The  effect  on  prices  must  be  the  same  when,  in  effecting 
transactions,  one  piece  of  money  is  used  ten  times  as  when 
ten  pieces  of  money  are  used  once."  * 

Ricardo,  too,  expresses  the  dodo-bone  theory  very  ex- 
plicitly. "If  the  state  charges  a  seigniorage  for  coinage, 
the  coined  piece  will  generally  exceed  the  value  of  the  un- 
coined piece  of  metal  by  the  whole  seignioiage,  becuse  it 
will  require  a  greater  quantity  of  labour,  or,  which  is  the 
same  thing,  the  value  of  the  produce  of  a  greater  quantity 
of  labour,  to  procure  it. 

"While  the  state  alone  coins,  there  can  be  no  limit  to 
this  charge  of  seigniorage;  for,  by  limiting  the  quantity  of 
the  coin,  it  can  be  raised  to  any  conceivable  value.    It  is 

'Nicholson,  J.  S.,  Money  and  Monetary  Problems,  pp.  64-66;  71-73. 


132 


THE  VALUE  OF  MONEY 


11 


on  this  principle  that  paper  money  circulates;  the  whole 
charge  for  paper  money  may  be  considered  a  seigniorage. 
Though  it  has  no  intrinsic  value,  yet,  by  limiting  its  quan- 
tity, its  value  is  as  great  as  an  equal  denomination  of  coin, 
or  of  bullion  in  that  coin."' 

Would  the  dodo-bones  circulate?    Nicholson  chose  the 
illustration  to  throw  into  the  sharpest  relief  the  absence  of 
any  value  from  a  non-monetary  employment.    Nobody 
has  any  use  for  them  as  dodo-bones.    What  economic 
force  is  there,  then,  to  make  them  circulate?    Nicholson 
says  nothing  about  an  agreement  among  the  traders,  assign- 
ing a  significance  -  to  the  dodo-bones,  so  that  they  might 
function  in  the  same  way  that  poker  chips  do— indeed,  any 
such  notion  would  vitiate  his  illustration,  for  he  proposes 
to  explain  an  adjustment  of  prices  by  natural  economic 
laws.    Why  then,  will  any  of  the  traders  give  up  his  valu- 
able commodities  for  the  worthless  dodo-bones?    Will  you 
say  that  he  will  take  them,  not  because  he  wants  them 
himself,  but  because  he  knows  that  others  will  take  them 
from  him?    But  why  would  the  others  want  them?    Be- 
cause they  in  turn  can  unload  them  on  still  others?    But 
this  seems  a  plain  case  of  the  vicious  circle.     It  is,  in  effect, 
saying  that  the  dodo-boncs  will  circulate  because  they  will 
circulate.     A  will  take  them  because  B  will  take  them;  B 
will  take  them  because  C  will  take  them,  C  because  .  .  . 
N  will  take  them;  N  takes  them  because  A  will  take  them.=» 
I  do  not  deny  that  if  the  traders  used  the  dodo-bones  as 

«  Works,  McCuUoch  cd.  1852,  p.  213. 

» if.  the  criticism  of  Nicholson  by  W.  A.  Scott,  Money  and  Banking, 

190,}  ed.,  ch.  4.  ...  If  1 

'  Cf.  Mill,  Primiplis,  Bk.  Ill,  ch.  xiii,  par.  i.  "NothinR  more  is  needful 
to  make  a  person  accept  anything  as  money,  and  even  at  any  arbitrary 
value,  than  the  persuasion  that  it  will  Ik;  taken  from  him  on  the  same  terms 
!)>•  others."  It  is  not  quite  fair  to  identify  Mill's  doctrine  with  the  circle 
stated  alwive,  hfuvever,  since  Mill  couples  it  with  a  reference  to  convention, 
resting  on  the  influence  of  Roxernment— a  mention,  without  analysis,  of 
some  of  the  factors  to  l)e  discussed  shortly. 


DODO-BONES 


»33 


counters,  agreeing  that  such  dodo-bones  should  represent 
some  other  commodity  chosen  as  a  standard  of  values, 
that  the  dodo-bones  would  circulate.  But,  in  that  case, 
they  would  be,  not  primary,  self-sustaining  money,  but 
merely  representative,  or  token  money.  And  just  here  let 
me  lay  down  two  general  propositions  '  respecting  the  two 
main  functions  of  money:  to  serve  as  a  standard,  or  com- 
mon mea.sure,  of  values,  the  article  chosen  must,  as  such, 
be  valuable.  The  thing  measured  must  be  either  a  frac- 
tion or  a  multiple  of  the  unit  of  measurement.  But  this 
quantitative  relation  can  exist  only  between  homogeneous 
things.  The  standard,  or  measure,  of  values,  then,  must 
be  like  the  commodities  whose  values  it  is  to  measure,  at 
least  to  the  extent  of  having  value. "^  The  second  proposi- 
tion is  respecting  the  medium  of  exchange.  The  medium 
of  exchange  must  also  have  value,  or  else  be  a  representative 
of  something  which  has  value.  There  can  be  no  exchange, 
in  the  economic  sense — I  abstract  rom  disguised  benev- 
olences, accidents,  and  frauds — without  a  quid  pro  quo, 
without  value  balancing  value,  at  least  roughly,  in  the 
process.  Now  when  it  is  remembered  that  the  intervention 
of  the  medium  of  exchange,  taking  the  place  of  barter, 
really  breaks  up  a  single  exchange  under  the  barter  sys- 
tem into  two  or  more  independent  exchanges,  and  that  the 
medium  of  exchange  is  actually  received  in  exchange  for 
valuable  commodities,  it  follows  clearly  that  the  medium 
of  exchange  must  either  have  value  itself,  or  else  represent 
that  which  has  value.  These  two  propositions  seem  almost 
too  obvious  to  require  the  statement,  but  they  contradict 
the  quantity  theory,  and  they  arc  not,  on  the  surface, 
reconcilable  with  certain  facts  in  the  history  of  incon- 


'  Cf.  Knies,  Das  Geld,  I,  p.  140. 

■Cf.  Huiliil   Value,  lii.   j.    Infra,  our  chapter  on  "The  Functions  of 
Money." 


134 


THE  VALUE   OF  MONEY 


iir!] 


i 


10 


vertible  paper  money.  It  is  necessary,  therefore,  to  state 
them,  and  to  examine  further  some  of  the  phenomena 
which  seem  to  contradict  them.  If  they  are  true,  Nichol- 
son's dodo-bones  will  perform  neither  of  the  primary  func- 
tions of  money.  They  have  no  value,  per  se — they  cannot, 
then,  measure  values;  they  are  neither  valuable  nor  titles 
to  valuable  things — they  ;»re  not  quid  pro  quo  in  exchange, 
and  will  not  circulate. 

I  shall  not  pause  long  to  discuss  the  doctrine  that  money 
needs  no  value  itself,  because  it  is  really  a  sort  of  title  to,  or 
claim  on,  or  representative  of,  goods  in  general.  The  no- 
tion, first,  would  not  pass  a  lawyer's  scrutiny.  There  are 
no  such  indefinite  legal  rights.  A  system  of  legally  fixed 
prices,  with  a  socialistic  organizatiim  of  society,  would  be 
necessary  to  give  it  definiteness— and  in  such  a  situation 
there  would  be  no  room  for  a  quantity  theory  of  prices! 
Economic  goods,  as  distinct  from  iiioney,  are  not  generally 
"fungible"  to  the  extent  that  would  make  them  indifferent 
objects  'if  legal  rights.  Besides,  whether  or  not  the  thing 
is  logically  thinkable,  it  is  legally  false.  Legal  factors 
enter  into  the  economic  value  of  money,  as  will  later  be 
shown,  but  it  is  economic,  and  not  legal,  value,  which 
makes  money  circulate.  HellTeiich  has  taken  the  trouble 
to  give  the  notion  of  money  as  a  mere  title  to  things  in 
general  a  somewhat  more  fundamental  analysis,  and  I 
would  refer  the  reader  who  is  not  satisfied  by  the  foregoing 
on  this  point  to  his  discussion.' 

I  wish  to  make  very  clear  precisely  how  much  I  mean  by 
the  foregoing  argument  that  circular  reasoning  is  involved 
in  saying  that  A  will  take  the  dodo-bones  because  B  will 
takfj  them.  The  same  question  arises  for  B,  and  for  the 
others.  The  real  question  is  as  to  the  cause  for  any  general 
practice  of  the  sort.     Why  should  A  suppose  that  B  will 

'  Das  Gdd,  Leipzig,  1903,  p.  477. 


ii 


DODO-nONES 


135 


take  them?  What  could  bring  about  such  a  system  of 
social  relations  that  a  general  expectation  of  this  sort 
could  arise? 

Kemmerer  undertakes  to  give  an  answer  in  a  hypothetical 
case  by  the  following  ingenious  assumption  (Money  and 
Credit  Instrutnents,  p.  ii):  the  money  consists  of  an  article 
which  formerly  had  a  high  commodity  value,  which  has 
lately  entirely  disappeared,  but  the  money  continues  to 
circulate,  through  the  influence  of  custom,  and  because  of 
the  demand  for  a  medium  of  exchange. 

In  this  illustration  Kemmerer  recognizes  the  historical 
fact  that  money  has  originated  Trom  some  commodity 
which  had  value  because  of  its  significance  as  a  commodity. 
Historically,  a  great  many  difTerent  commodities  have 
served,  and  gold  and  silver  finally  emerged  victors  for 
reasons  which  need  not  just  now  concern  us.  These  his- 
torical facts,  coupled  with  the  idea  that  value  is,  essen- 
tially, "something  physical,"  '  or  coupled  with  the  notion 
that  value  arises  only  from  marginal  utility,  or  from  labor, 
have  been  accepted  by  the  Commodity  or  Metallist  School 
as  sufficient  proof  that  standard  money  is  only  possible 
when  made  of  some  valuable  commodity.  Professor 
Laughlin  seems  to  think  of  the  whole  thing  as  depending 
on  the  value  of  gold  bullion,  and  to  recognize  the  money- 
emplo>Tnent  as  a  factor  in  affecting  the  value  of  money 
only  in  so  far  as  it  draws  gokl  away  from  the  arts,  and  so 
raises  its  value  there  by  lessening  the  supply.-  If  money 
originated  in  a  commodity,  how  is  it  possible  for  the  com- 
modity value  to  be  withdrawn,  and  for  money  still  to  retain 
its  value? 

This  brings  us  to  a  question  I  have  raised  before,  namely, 

'  I-auchlin.  rejoinder  to  (low,  "The  Quantity  Theory  and  its  Critics," 
in  Jour,  of  Pol.  llcoii.,  190.'. 
'  Principlis  of  Muiiiy,  passim. 


Ill 

^.  ] 

T  ^ 

Jl    1    £    *4. 

136 


THi;  \Ai,i;i:  ok  monky 


whether  the  genetic,  or  historical  account  of  a  social  situa- 
tion, and  the  cross-section  analysis  of  the  same  situation, 
necessarily  agree.'  Is  it  possible  that  when  a  commodity 
basis  was  necessary  to  start  the  thing,  and  when  even  in  the 
modern  world  gold  bullion,  interconvertible  with  gold 
coin,  remains  the  ultimate  basis  of  the  money-systems  of 
all  great  commercial  peoples,  that  you  could  withdraw  the 
commodity  support  and  keep  money  unchanged  in  value.-* 
Or  could  you  e\cn  have  any  value  left  at  all?  Now  in 
answer,  I  propose  to  admit  the  {wssibility  of  so  doing. 
The  forces  which  a  cross-section  analysis  reveals  are  not 
necessarily  identical  with  those  which  a  theory  of  origins 
sets  forth.  Once  the  thing  is  set  going,  the  forces  of  in- 
ertia favor  it.  A  new  theory,  fi.ved  in  the  minds  of  the 
jieople,  say  the  (luantity  theory  itself,  might  give  them  such 
confidence  in  their  money  that  its  value  might  be  main- 
tained. A  fiat  of  the  government,  making  the  money 
legal  tender,  supplemented  by  the  loyalty  of  the  people, 
might  keep  up  its  value.  I  think  there  is  reason  to  believe 
that  this  is  a  source  of  no  little  importance  of  value  for  the 
German  paper  money  to-day,  and,  to  a  less  extent,  of  the 
notes  of  the  Biwquc  dc  France.  All  these  possibilities  I 
admit.  Value  is  not  physical,  but  psychological.  And 
the  form  of  value  with  which  we  are  here  concerned,  eco- 
nomic value  par  excellence,  is  a  phenomenon  of  social,  rather 
than  individual  psychology.  Many  and  comple.x  are  the 
psychical  factors  lying  behind  it.  Belief,  custom,  law, 
patriotism,  particularly  a  network  of  legal  relationships 
growing  out  of  contracts  expressed  in  terms  of  the  money 
in  question,  the  policy  of  the  state  as  to  receiving  the 
money  for  public  dues,  the  influence  of  a  set  of  cus- 
tomary or  legally  prescribed  i)rites,  which  tie  the  value  (»f 

'  C/.  .Sihiiil  Wiliti,  \ti).  ij2-ij'>,  and  siipni,i:h.  on  "Mari;inal  Utility  and 
\'aluc  of  Money.'' 


DODO-BONKS 


137 


money  to  a  certain  extent  to  the  values  of  goods —factors 
of  this  character  can  add  to  the  value  of  money,  and  can. 
conceivably,  even  sustain  it  when  the  original  source  of 
value  is  gone.    Social  economic  value  does  not  rest  on 
marginal  utility.     In  general,  utility  is  essential,  as  one 
of  many  conditions,  before  value  can  exist,  even  though 
the  intensity  of  the  marginal  want  ser\'ed  by  a  good  bears 
no  definite  relation  to  its  value.    But  in  the  case  of  the 
value  of  a  money  of  the  sort  here  considered,  marginal 
utility  is  in  no  sense  a  cause  of  the  value.    Rather,  the 
marginal  utility  '  of  such  money  to  an  individual  is  wholly 
a  reflection  of  its  social  value,  and  changes  when  that 
social  value  changes.     It  is  quite  consistent  with  the  gen- 
eral theory'  of  economic  value  which  I  have  set  forth  in  Social 
Value,  for  me  to  admit  possibilities  of  this  kind.    The 
value  of  money  in  such  a  case  has  become  divorced  from 
its  original  presuppositions.    The  paper,  originally  resting  • 
on  a  commodity  basis,  or  the  coins  originally  valued  be- 
cause they  could  be  transformed  into  non-monetary  ob- 
jects of  value,  have  become  objects  of  value  in  themselves. 
Analogous  phenomena  are  common  enough  in  the  general 
field  of  values,  and  are  less  common  in  the  field  of  economic 
values  proper  than  one  might  suj  i)ose.    Thus,  most  moral 
values  tend  to  become  independent  of  their  presupposi- 
tions.   Moral  values  of  modes  of  conduct  have  commonly 
arisen  because  those  modes  of  conduct  were,  or  were  sup- 
posed to  be,  advantageous  in  furthering  other  ends.    Moral- 
ity, in  its  essence,  is  teleogicd.    Yet  so  far  have  the  moral 
ideals  become  ends  in  themselves  that  it  is  possible  to  have 
great  thinkers,  like  Kant  and  Fichte,  setting  them  up  as 
eternal  and  unchangeable  categorical  imperatives,  regard- 

'  Strictly  speaUng,  there  is  no  marginal  utility,  but  only  a  "subjective 
value  in  exihanKc"  for  money  of  the  sort  here  discussed.  See  supra,  the 
chapter  on  "Marginal  Utility." 


138 


THE   VALUE  OF  MONEY 


less  of  consequences.  Thus  Fichte  declares,  "  I  would  not 
tell  a  lie  to  save  the  universe  from  destruction."  Older 
still  is  the  dictum,  ''Fiatjuslilia,  ruat  coelum."  Yet  truth 
and  justice,  in  the  history  of  morals,  and,  in  the  view  of 
most  moral  thinkers  to-day,  are  of  value  primarily  be- 
cause they  tend  to  preserve  the  universe  from  destruction, 
and  would  nevir  have  become  morally  valuable  had  they 
had  the  other  tendency!  Legal  values  manifest  this  tend- 
ency even  more — one  needs  only  to  point  to  our  vast  body 
of  technical  rules  of  procedure  in  criminal  cases,  which  per- 
sist long  after  their  original  function  is  gone,  and  after  they 
have  become  highly  pernicious  from  the  standpoint  of  the 
ends  originally  aimed  at.  In  the  sphere  of  the  individual 
psychology  the  phenomenon  is  very  common.  The  miser's 
love  for  money  is  a  classical  example.  The  housewife  who 
so  exalts  the  cleanliness  of  her  home  that  the  home  be- 
comes an  unhappy  place  in  which  to  live,  is  an  often- 
described  tj^pe.  The  man  who  retires  from  business  that 
he  may  enjoy  the  gains  for  the  sake  of  which  he  entered 
business  often  finds  that  the  business  has  become  a  thing  of 
value  in  itself,  and  longs  to  be  back  in  the  harness,  while 
many  men,  long  after  economic  activity  is  no  longer  neces- 
sary, continue  the  struggle  for  its  own  sake.  Activities 
arise  to  realize  values.  The  value  of  the  activity  is  de- 
rived from  the  value  aimed  at.  But  consciousness  is 
economical,  and  memory  is  short.  The  activities  become 
habits.  The  habl*s  gather  about  themselves  new  psycho- 
logical reactions.  The  interruption  of  habitual  activities 
is  distasteful.  Life  in  all  its  phases  tends  to  go  on  of  its 
own  momentum.  The  activities  tend  to  become  objects 
of  value  in  themselves,  whether  or  not  their  original  raison 
d'etre  persist.  In  both  the  social  and  the  individual  sphere, 
apart  from  blind  inertia  and  mechanical  habit,  active  in- 
terests tend  to  perpetuate  the  old  activities,  whose  raison 


DODO-BONES 


»39 


d'itrc  is  gone.  The  judge  who  continues  to  apply  the  out- 
grown absurdities  of  adjective  law  may  do  it  from  timidity 
or  from  being  too  lazy  to  think  out  the  new  problems  whose 
solution  must  precede  readjustment  to  present  social  needs, 
but  the  criminal  lawyer  who  can  free  his  guilty  client  by 
means  of  these  technicalities  has  an  active  interest  in 
their  perpetuation.  The  individual  who  would  readjust  his 
conduct  in  the  light  of  changed  interests  finds  that  active 
opposition  is  met  in  the  emotional  accompaniment  of  the 
old  habits.  The  economic  society  may  wish  to  be  free 
from  a  money  whose  original  value  is  gone,  but  there  is  a 
powerful  debtor  interest  which  approves  of  that  money, 
and  whose  support  tends  to  maintain  its  value. 

All  these  possibilities  I  admit.  My  own  theory  of  value, 
which  finds  the  roots  of  economic  value  ramifying  through 
the  total  social  psychological  situation,  rather  than  in  util- 
ity or  labor-pain  alone,  involves  possibilities  like  these. 
But — and  this  is  a  point  I  wish  especially  to  stress — we 
are  out  of  the  field  of  mechanics,  and  in  the  field  of  social 
psychology,  when  we  undertake  to  explain  the  value  of 
money  that  way.  No  longer  is  there  any  mathematical 
necessity  about  the  matter.  There  is  no  such  a  priori  sim- 
plicity as  the  quantity  theory  deals  with.  Factors  like 
these  might  maintain  the  value  of  money  for  a  time,  and 
then  wane.  These  factors  might  vary  in  intensity  from 
day  to  day,  with  changing  political  or  other  events,  leading 
the  value  of  money  to  change  from  day  to  day,  quite  irre- 
spective of  changes  in  its  quantity.'    In  so  far  as  you  have 

'  The  psychological  reactions  of  the  people  in  times  of  stress  and  uncer- 
tainty toward  different  kinds  of  money  cannot  \x  pre<licted  with  any  cer- 
tainty, and  there  seems  to  Ik  absolutely  no  defmite  or  universal  law  govern- 
ing the  matter.  The  present  writer  collected  a  lot  of  newspaper  clippings 
at  the  outbreak  of  the  present  World  War.  From  these  it  appears  that  in 
both  I'aris  and  Berlin  there  was  a  very  great  distrust  of  bank-notes,  and  an 
insistence  by  retailers,  restaurants,  landladies,  etc.,  on  coin.  But  iiVtwr, 
which  was  not  standard  money,  seems  to  have  been  accepted  without  quea- 


I40 


TlIK   VAI.UK   OK   MONKY 


a  people  ignorant  of  the  nature  of  money  and  of  monetary 
problems,  a  people  in  the  bonds  of  custoi",  with  slightly 
developed  commercial  life,  whose  economic  activities  run 
in  familiar  grooves  unreflec»'vely,  you  will  most  nearly 
approximate  a  situation  like  that  which  Professor  Kem- 
mercr  assumes.  But  that  means  that  what  might  be  true 
in  India,  or  to  a  less  degree  in  Austria— countries  to  which 
the  quantity  theorists  arc  accustomed  to  refer  -need  not 
at  all  be  true  in  the  United  States.  Here  everybody  was 
talking  about  the  theory  of  money  in  1896 — not  necessarily 
very  intelligently! -and  here,  moreover,  such  phrases  as 
"good  as  gold,"  and  i)ropositions  like  that  which  came 
from  Mr.  J.  P.  Morgan  in  his  testimony  before  the  Pujo 

lion.  When  hourdinK  is  referred  to  in  these  clippings,  it  is  invariabiy  nold 
that  is  mentioned.  .\  similar  hourdinK  of  j{old  t(M)ic  place  during  the  Balkan 
crisis  at  the  time  of  the  outbreak  of  the  war  between  the  Kalkan  .Mlies  and 
Turkey.  Professor  K.  !•"..  A(?ner  informs  me,  however,  that  he  has  fmin<i 
some  evidence  that  bank-notes  as  well  as  Rold  were  hoarded  in  Austria,  at 
this  time. 

Sometimes  we  ha\c  a  susi)ension  of  (Jrcsham's  law,  and  an  acceptance 
of  all  kinds  of  money  at  varunj;  ratios.  The  following  clippinR  from  the 
Boston  Herald  of  .March  17,  igi4,  illustnitcs  this:  "DouKlas,  .\riz.,  .March 
16. — Four  kinds  of  money  are  now  circulating  in  the  .Mexican  territory  con- 
trolled by  the  Constitutionalist: .  These  are  L'nite<l  States  currency,  the  first 
issues  of  the  Constitutionalist  government  and  of  Sonora  state,  and  'Villa 
money,'  or  that  issue<l  by  Chihuahua  at  the  instance  of  the  rebel  military 
commander.  United  States  takes  prcceilencc.  Merchants  in  Sonora,  in 
order  to  protect  themscKes  and  at  the  siimc  time  observe  the  laws  rcciuirinR 
acceptance  of  the  rebel  currency  issues,  have  established  a  sliding;  scale  of 
prices.  This  was  distxivereci  when  live  merchants  were  arrested  at  Canam-a 
by  Constitutionalist  secret  service  men,  who  found  that  for  American  money 
they  could  buy  rocxIs  for  less  than  half  the  amount  e.xacte<l  when  payment 
was  oflercd  in  .Mexican  currency.  The  uncertainty  of  the  rebel  campaign 
against  Torreon  is  reflected  in  the  money  market.  To-day  Constitutionalist 
sold  for  22  and  28  cents  .\merican  on  the  (leso.  Mexican  federal  currency 
commande<l  from  .?o  to  <,2  lenls."  In  the  ex()erience  of  travellers  who  ha\c 
discusse<l  the  matter  with  the  writer,  there  was  little  of  this  flexibility  of 
relation  between  pa|HT  money  and  coin  in  Kerlin,  or  Paris  at  the  outbreak 
of  the  present  War.  Where  pa|>er  was  refused,  !t  was  absolutely  refus«il, 
and  where  it  was  accepte<l,  it  seems  to  have  been  acie|)te<J  without  discount. 
.\'()  doubt,  a  fuller  invcstiK.iiiim  would  reveal  all  manner  of  variation  in  the 
beli.ivior  of  different  |Kt»ple  in  different  centres,  and  at  the  same  centres,  at 
the  outbreak  of  the  War. 


UODO- BONES 


141 


Committee  that  "gold  is  money,  and  nothing  else,"  would 
seem  to  indicate  that  a  very  great  part  of  our  people  might 
utterly  distrust  such  a  money  as  Professor  Kemmerer 
describes.  The  banker's  tendency  to  look  behind  for  the 
security,  to  test  things  out,  to  seek  to  get  to  bed-rock  in 
business  affairs,  holds  with  a  great  many  people.  An 
overemphasis  on  this  is  responsible  for  the  doctrine  of 
Scott '  and  Laughlin  -  that  the  sole  source  of  the  value  of 
inconvertible  paper  money  is  the  prospect  of  redemption, 
and  that, inconvertible  paper  money  differs  from  gold  in 
value  by  an  amount  which  exactly  equals  the  discount  at 
the  prevailing  rate  of  interest,  with  allowance  for  risk,  for 
the  period  during  which  people  expect  the  paper  money 
to  remain  unredeemed.  We  have  not  the  banker's  psychol- 
ogy to  any  such  extent  as  that.  Apart  from  the  fact  that 
the  money  function  adds  to  the  value  of  money,  under 
certain  circumstances, — a  point  to  be  elaborated  shortly — 
other,  non-rational  factors,  contagions  of  depression  and 
enthusiasm,  patriotic  support,  "gold  market"  manipula- 
tions, etc.,  ^  ntered  to  break  the  working  of  the  credit  theory 
of  paper  money  as  applied  to  the  American  Greenbacks. 
I  may  I  ere  express  the  opinion  that  the  credit  theory  is  the 
fundamental  principle  in  the  explanation  of  the  value  of 
the  Greenbacks,  however.  But  we  have  not  the  banker's 
psychology  to  any  such  extent  as  the  extreme  forms  of 
that  theory  would  assume.  "Uncle  Sam's  money  is  good 
enough  for  me."  is  a  phrase  I  have  heard  from  the  Popu- 
lists,— who,  by  the  way,  were  pretty  good  quantity  theo- 
rists! "The  government  is  behind  it."  There  are  plenty 
of  men  for  whom  that  assurance  would  be  enough.  In- 
deed, the  general  notion  that  in  some  way,  not  specified, 
perhaps  not  yet  known  to  anybody,  the  government  will 

'  Monfv  and  Banking,  1903  ed.,  pp.  58-60;  101-104. 
*  Principles  of  Money,  p.  530. 


tfi 


ig  i 


!,!  i 


■II 


142 


Tin:  VALrF,  of  monky 


'In  what  is  necessary  to  maintain  the  value  of  its  money  Is 
a  ground  whi(  h  mij^'ht  w<H  inlluent  e  evrn  the  most  sophis- 
ticated l)anker.  [  think  su(  h  a  ijencral  fomKlenie  in  the 
lin^rh'sh  govemment  has  clearly  been  a  factor  in  the  j)rice 
<if  Sterling  exchange  since  the  balance  of  trade  turned  so 
overwhelmingly  against  England  in  the  present  War.' 
Our  monetary  history.  I  may  add.  has  In-en  in  considerabK 
measure  a  struggle  between  these  two  opj)osing  psychohtg- 
ical  reactions  on  that  point.  The  utter  breakdown  of  the 
//.//  theory  came  in  Rhode  Island,  and  in  connection  with 
the  Continen'al  Currency,  in  the  clays  before  the  Constitu- 
tion was  adopted.  On  the  other  hand,  I  do  not  believe 
that  those  who  put  a  banker  inside  every  one  of  us  can 
prove  that  their  principle  has  been  a  complete  explanation 
at  any  stage  of  our  monetary  history.  But  clearly  con- 
siderations like  these  take  away  all  mathematical  cer- 
tainty from  the  matter. 

The  foregoing  analysis  makes  clear,  I  trust,  that  the 
notion  that  the  money  function  alone  can  make  an  other- 
wise valueles>  money  circulate  is  untenable.  There  must 
!)(■  value  from  other  sources  as  well.  All  that  is  conceded 
is  that  there  need  not  be  a  physical  commodity  as  the 
basis  of  the  money.  Value  is  not  necessarily  connected 
with  a  physical  commodity. 

There  is  a  disjwsition  on  the  part  of  many  quantity 
theorists  to  beg  the  cjuestion  at  the  outset,  to  assume  money 
as  circulating,  without  realizing  how  much  this  assumption 
involves.  The  assumi)iion  involves  the  further  assumption 
that  there  are  rausts  for  the  circulation  of  money.  But  the 
same  cau.ses  which  make  money  circuhur  will  also  be  fac- 
tors in  the  determination  of  the  Icrms  on  whit  h  it  circulates, 
/.  f.,  the  {)rices.  To  seek  then,  by  a  new  principle,  the 
quantity  theory,  to  explain  these  prices  without  reference 
'  Written  in  December,  1014. 


DODO- BONES 


MJ 


to  these  causes,  Is  a  remarkable  procedure.  There  is  some- 
times a  disjM)sition  to  do  the  thiiiK  quite  simply  imieed: 
lieline  money  a^  the  circulating  medium,  and,  by  dijinilion, 
you  have  it  circulating:  A  rather  striking  case  of  this, 
which  is  either  tautology  or  circular  reasoning,  appears  in 
Fisher's  Pimhashig  Pmver  of  Money  ([>.  i.'g):  "Take  the 
case,  for  instance,  of  paper  money.  So  long  as  it  has  the 
tlistimtive  chanicltristif  of  money,  -gener-il  iiireptahility  at 
its  Icnal  t'(;/»r,-and  is  limited  in  rjuantity,  its  value  will 
onlinarily  be  eciual  to  that  of  it>  legal  ecjuivalent  in  gold." 
(Italics  mine.) 

It  is  not  quite  easy  to  construct,  eveti  ideally,  a  social 
psychology  which  w«>uld  perfectly  lit  the  quantity  theory. 
One  would  have  to  assume  that  money  circulates  purely 
from  habit,  without  any  [)resenl  reason  at  all.  The  assump- 
tion must  be  that  the  economic  life  runs  in  steady  grooves, 
so  that  quantity  of  goods  exchanged  will  always  be  ine  same, 
or  at  least,  that  it  will  always  be  the  same  proportion  of  the 
goods  produced  there  must  be  no  option  of  speculative 
holding  out  of  the  market  allowed  the  holder  of  exchange- 
able goods.  The  individuals  must  have  constant  habits 
as  to  the  proportions  of  the  money  they  receive  to  be  s|)ent 
and  to  be  held  for  emergencies.  All  the  factors  aflecting 
"velocity"  of  both  money  and  goo<ls  must  be  constant- 
Professor  Fisher  maintains  very  explicitly  that  velocities, 
both  of  money  and  of  bank-deposits  are  fixed  by  habit 
{loc.  cil..  p.  152),— and,  in  any  case,  the  assumption  is 
necessary.  A  thoroughly  mechanical  situation  must  be 
assumed,  where  there  is  the  rule  of  blind  habit.  Given  >uch 
a  mechanism,  you  pour  in  money  at  one  end,  and  it  grinds 
out  prices  at  the  other  end,  automatically.  But,  strangely 
enough,  in  this  social  situation  where  blind  habit  rules, 
prices  are  perfectly  fluid!  In  India,  or  in  other  countries 
where  the  assiunptions  of  the  quantity  theorist  come  most 


144 


TIIK  VALUE  OF  MONEY 


nearly  t(j  realization,  so  far  as  the  general  r  ' '  >!'  habit  is 
concerned,  one  finds  also  many  ( ustoniary  <;s.  In  a 
country  completely  under  the  rule  of  habi  he  prices 
would,  as  a  matter  of  psychological  necessity,  be  also  fixed. 
VV^hat  mignt  then  be  exj)ected  to  happen  in  such  a  country, 
if  an  economic  exjierimenter  should  disturb  them  in  their 
habitual  quantity  of  money?  Which  habits  would  give  way. 
those  relating  to  prices,  or  those  to  velocities,  or  those 
relating  to  quantities  of  gcMnls  exchanged?  '  I  shall  not 
trouble  to  solve  this  problem,  as  it  seems  to  mc  not  the  most 
useful  way  to  approach  the  problem  of  the  value  of  money, 
but  I  submit  it  to  the  consideration  of  advocates  of  .he 
quantity  theory.  My  present  purpose  is  accomi)lished  in 
IM)inting  out  the  psychological  assumptions  which  the 
quantity  thcH)ry  makes:  a  psychology  of  blind  habit,  in  a 
situation  where  the  price-level  is  free  from  control  by  cus- 
tomary prices. 

Now  at  another  jwint  I  wish  to  mediate  between  the 
quantity  th(.H)rists  and  their  extreme  opjK)ncnts.  Repre- 
sentatives of  the  Metallist  of  Commcxlity  School — like 
Professor  Laughlin,  and  Professor  Scott  in  his  earlier  writ- 
ings seem  to  deny  that  the  money -emploj-ment  has  any 
direct  effect  in  increasing  the  value  of  money.  The  money- 
employment  afTects  the  value  of  money  only  indirectly,  by 
withdrawing  the  money  metal  from  the  arts,  so  raising  the 
value  of  the  money  metal,  and  consequently  raising  the 
value  of  the  coinetl  metal.  The  quantity  theory,  on  the 
other  hand,  would  utterly  divorce  the  value  of  money  from 
causal  dejjendence  on  the  stufT  of  which  the  money  is  made. 
Both  these  views  seem  to  me  extreme.  Unless  money  h:is 
value  from  some  source  other  than  the  money  emplojTnent, 
it  cannot  be  used  as  money  at  all.    Nobody  will  want  it. 


'(/.  Clow.  K.  K, 

I'.iilll.,    I(>0.',  p.  (OJ. 


"The  Quantity  Theory  and  its  Critifs,"  Juur.  of  Pol. 


DODO-BONES 


MS 


On  the  other  hand,  the  money  use  is  a  valuable  use.    Ex- 
change is  a  productive  process.    Money,  as  a  tool  of  ex- 
change, enables  men  to  create  values.   And  you  can  measure 
the  value  of  the  money  service  very  easily  at  a  given  time 
if  you  look  at  the  short  time  "money-rates,"  i.  e.,  rates  of 
discount  on  prime  short  term  paper.    These  are  properly  to 
be  considered,  not  interest  on  abstract  capital,  but  the  rent 
of  a  particular  capital-good,  namely,  money.    The  money 
is  hired  for  a  specific  service,  namely,  to  enable  a  man  to  get 
a  specific  profit  in  a  commercial  transaction.    Money  is 
not  the  only  good  which  can  be  thus  employed,  and  which 
is  paid  for  for  this  purpose.    Ordinarily  a  man  will  pay  for 
money  for  this  purpose.    Sometimes,  however,  one  needs 
the  temporary  use  of  something  else  more  than  one  needs 
money,  anc  the  holder  of  money  pays  a  premium  for  the 
privilege  of  temporarily  holding  the  other  thing.    I  refer 
especially  here  to  the  practice  of  "borrowing  and  carrying" 
on  the  stock  exchange.    The  "bear"  sells  stock  which  he 
does  not  possess,  and  must  deliver  the  stock  before  he  is 
ready  to  close  his  transaction  by  buying  to  "cover."    He 
goes  to  a  "bull"  who  has  more  stock  than  he  can  easily 
"carry,"  and  who  is  glad  to  "lend"  the  stock  in  return  for 
a  "loan"  of  its  equivalent  in  money.    Ordinarily  the  bull 
is  glad  to  pay  a  price  for  the  money,  as  it  is  of  service  to 
him.    Sometimes,  however,  the  situation  is  reversed,  and 
the  service  which  the  temjwrary  loan  of  the  stock  performs 
for  the  hard-pressed  bears  is  greater  than  the  service  which 
the  money  performs  for  the  bulls,  and  the  payment  is  re- 
versed.   When  the  bull  pays  a  premium  to  the  bear,  for 
the  use  of  the  money,  the  amount  paid  is  called  "carrying 
charge,"  "interest  charge  for  carrying,"  "contango,"  (Lon- 
don) or  (in  Germany)  ''Rcporir     Phis  is  the  usual  case. 
But  sometimes  the  bear  pays  the  bull  a  premium  for  thi- 
use  of  the  stock,  and  the  charge  is  then  called  "premium  for 


146 


TUF.   VALLE   OK   MON'EY 


use,"  "backwardation."  (London)  ox'' Deport"  (Germany).* 
Money  is,  thus,  not  the  only  thing  which  has  a  "use"  in 
addition  to  the  ordinary  "uses"  which  arc  the  primary 
source  of  its  value.-  In  the  case  of  other  things,  however, 
this  kind  of  "use"  is  unusual.  In  the  case  of  money  it  is 
the  primary  use.  The  essence  of  this  use  is  to  be  found  in 
the  emphnTiient  of  a  quantum  of  valtie  in  highly  saleable 
form  in  farilitatiig  commercial  transactions.  Commercial 
transactions,  in  this  sense,  are  not  limited  to  ordinary  buy- 
ing and  selling.  I  think  it  best  to  defer  further  analysis  of 
the  mv)ney  service  to  a  later  chapter,  on  the  functions  of 
money,  which  will  best  be  preceded  by  a  consideration  of 
the  origin  of  money.  For  the  present,  it  is  enough  to  note 
that  money  has  certain  characteristics  which  enable  it  to 
fat  ilitate  exchanges,  and  to  pay  debts,  better  than  anything 
else,  and  that  this  fact  makes  an  addition  to  its  value.  It 
i>  possible,  I  think,  to  measure  this  addition  to  value  rather 
l)ri'cisely  in  certain  cases.  Thus,  in  the  case  of  the  Ameri- 
can (Jreenbacks,  we  fmd  them  at  a  discount,  say  from  the 
beginning  of  1877  on,  as  compared  with  the  gold  dollar  in 
which  they  weri'  to  be  redeemed  in  Jan.  1879.  I  think  it 
safe  to  contend  that  the  country  was  practically  free  from 
doubt  as  to  their  redemption  after  the  early  part  of  1877. 
The  discount  steadily  dimini.^hed  as  the  time  of  reilemption 
approached.  Laughlin's  theory  is  thus  far  beautifully 
vindicated.  The  central  fact  governing  the  value  of  the 
(ireenbacks  during  this  [)eriod  was  the  prosj)ect  of  redemp- 
tion. But,  and  here  I  think  we  see  the  influence  of  the 
money-use,  the  discount  v  .-.s  not  as  great  as  would  have 
been  called  for  by  the  prevailing  rate  of  interest,  as  measured 

'  (/.  l!miT>",  S fill iiliil inn,  |>|>.  oo-iji. 

'(/.  Hdhm-Hawcrk's  cTitiiismsof  the  "u«e"  theory  of  interest.  (Capital 
and  hiUrcst.  pas\im.]  Koth  use  theories  uml  |,riKliu:tivity  theories  .icr 
proliahly  sii>tKeste<l.  in  jKirt,  hy  iK-'cullarilies  whirh  miiney  iM>sses.s«'s  in  pre- 
eminent decree.    See  infra,  the  chapter  on  the  "Functions  of  .Money." 


DODO-BONES 


147 


by  the  yield  on  other  obligations  of  the  Federal  Govern- 
ment, at  this  time.    And  the  discount  completely  disap- 
peared  some   little  time   before  the  actual  redemption. 
I  see  no  cause  for   the  absence  of   a  discount  in   the 
later  months  of  1878  except  the  additional  value  which 
came  from  the  money  use.    This  additional  value  is,  ordi- 
narily, not  very  great.    And  money  is  not  alone  in  iwsses- 
sing  it.     In  extraordinary  circumstances  it  may  become 
quite  large.    Thus,  in  1873,  in  the  midst  of  the  panic,  the 
gold  premium  fell  sharply.    At  this  time  the  significance 
of  the  Greenbacks  as  a  legal  tender,  a  means  of  final  pay- 
ment of  obligations  (Zahlungs-  vr  Solulions-mitlcl).  us  dis- 
tinguished from  medium  of  exchange  (TuuschmiUd),  at- 
tained an  unusual  significance.     In  ordinary  times,   the 
marginal  value  of  this  function  of  money  sinks  to  zero,  but 
in  emergencies  it  may  become  very  great.     In  ordinary 
times,  during  the  (Greenback  period,  uncoined  gold  bul- 
lion, or  gold  coin  used,  not  as  money,  but  simply  by  weight 
in  exchanges,  played  an  important  role,  competing  with  the 
Greenbacks  in  various  emplo>'ments,  j>articularly  us  bank 
reserves,  and  as  secondary  bank  reser\es,  and  so  reducing 
the  marginal  value  of  the  money -emplo>Tnent  of  the  Green- 
backs themselves.    Gold  bullion  is  not  the  only  thing  which 
can  thus  serve,  however.    To-day,  and  generally,  securities 
with  a  wide  market,  capable  of  being  turned  quickly  into 
cash,  without  loss,  or  capable  of  .serving  as  the  basis  of  col- 
lateral loans,  up  to  a  high  percentage  of  their  value,  have  a 
much  higher  value,  for  a  given  yield,  than  have  other  se- 
curities, equally  siife,  but  less  well-known  and  less  easily 
saleable.    The  "one-house  bond"  (».  c,  the  bond  for  which 
only  one  banking  house  offers  a  ready  market)  must  yield 
a  great  deal  more  to  sell  at  a  given  price  than  the  bond  of 
cfjual  security  which  is  listed  on  the  exchanges,  and  has  a 
wide  market.     Part  of  this  is  in  illustration  of  another 


}• 


148 


TIIF.   VAI.Ui:   OF   MONFY 


function  of  money,  the  "bearer  of  options"  function, 
which  enal)k>  the  holder  to  preserve  his  wealth,  and  at  the 
same  time  ki-ep  options  f»)r  increasing  its  amount  when 
bargains  appear  in  the  market.  I'oreign  exchange  i)er- 
forms  many  of  these  functions  of  money  in  Kuropean 
countries,  particularly  Austria-FIungary.' 

The  notion  that  the  whole  \  alue  of  gold  coin  rests  on  its 
bullion  content  arises  most  easily  in  a  situation  where  free 
coinage  has  long  been  practiced,  and  where  there  are  no 
legal  obstacles  to  the  melting  down  of  coin  for  other  uses. 
Where  free  coinage  is  suspended,  the  peculiar  services 
which  only  money  can  perform  or  rather,  the  services 
which  money  has  a  dilTerential  advantage  in  performing  - 
may  easily  lead  to  an  agio  for  coined  over  uncoined  metal. 
The  mere  fact  that  coined  metal  is  «)f  a  definite  fineness 
well  known  and  attested  is  often  of  some  consecjuence, 
though  the  attestation  of  well-known  jewelers  may  give 
this  advantage  to  metal  bars  as  well,  for  large  transactions. 
Hut  for  smaller  transactions,  nothing  can  easily  take  the 
place  of  money.  A  high  premium  on  small  coins,  apart  from 
redemption  in  standard  money,  may  easily  arise  from  the 
money-use  alone.  And  standard  coin  may  well  attain, 
in  greater  or  less  degree,  a  j)remium.  If  it  is  .scarce,  as  com- 
pared with  the  amount  of  business  to  be  done,  this  pre- 
mium may  well  be  greater  than  if  it  is  abundant.  But  that 
an  indefinite  premium  is  possible,  or  that  this  premium 
varies  exactly  antl  inversely  with  the  quantity,  I  see  no 
reason  at  all  for  supposing.  If  the  premium  be  great  enough, 
men.  especially  in  large  transactions,  will  make  use  of  the 
uncoined  metal  just  as  they  did  use  gold  in  this  country 
during  the  (Ireenback  period.  The  advantages  of  money 
are  not  absolute.     Money  is  simply  more  convenient  for 

'  .\  mori'  prct  ist'  analysis  of  all  tlu-.c  |Miini-.  will  Ih'  ni\rii  in  tin  <  liu|tter 
un  "TIk-  I'uiu  linns  nf  .Mnncv." 


m 


DODO-noNF.S 


I4Q 


many  purposes  than  other  things.  The  possibility  <>f  a 
premium  is  limited  by  the  |M)Shibility  of  substitutes.  It  is 
further  limited  by  the  fuel  that  a  high  premium  w«>ul<l 
awaken  a  distrust  which  would  bring  the  premium  to 
destruction,  by  destro>ing  trade  and  so  destroying  the 
money-use  on  whieh  the  premium  is  based. 

A  detailed  discussion  of  the  Indian  Rui>ee  since  189,?  lies 
outside  the  scope  of  this  chapter.  I  think  it  may  be  well, 
however,  to  recognize  at  this  i)oint  that  the  limitation  in 
the  quantity  of  the  ruix*e.  through  abrogation  of  free  coin- 
age, was  a  factor  in  the  subsequent  rise  in  its  value.  It 
was  not  the  only  factor,  by  any  means.  But  it  was  a  factor. 
It  ma>-  be  also  recognized  as  a  factor  in  the  value  of  Aus- 
trian paper  money. 

The  doctrine  just  laid  down,  as  to  the  influence  of  the 
money-use  in  adding  to  the  value  of  money,  is  in  no  sense 
the  same  as  the  quantity  theory.    For  one  thing,  it  is  easily 
<lemonstrate(l  that  the  value-curve  for  the  uses  of  money  is 
not  described  by  the  equation,  xy  =c.    This  curve  expresses, 
in  terms  of  value,  the  idea  of  proportionality  which  is  an 
essential  part  of  the  quantity  theory.    Put  in  terms  of  the 
money  market,  we  have  a  tlemand-curve  for  money,  not  for 
the  long-time  possession  of  money,  but  for  its  temjMJrary 
use— a  rental,  rather  than  a  capital  value,  is  expressed  in 
the  price  which  this  curve  helps  to  determine.    This  curve 
is  highly  elastic.    When  money-rates  are  low.  transactions 
will  be  undertaken  which  will  not  be  undertaken  when 
the  rate  is  a   little   higher.     In   the  second  place,   the 
m<thod   of  approach   is  very   difTerent.      It   is  not   the 
whole  volume  of  transactions  which  must  employ  money, 
but  only  a  flexible  part.    In  the  third  place,  the  money- 
use  is  here  conceived  of  as  a  source,  not  of  the  whole 
value  c)f  money,  but  only  of  a  differential  portion  of  that 
value.    In  the  fourth  place,  the  argument  runs  in  terms  of 


«50 


THE  VALUE  OP  MONEY 


!■ 


the  absolute  \alue  of  money,  and  not  in  terms  of  the  level 
of  prices. 

It  is  not  the  Kj;al  peculiarity  of  money,  as  legal  tender, 
which  is  necessarily  resiM)nsil)lf  for  this  agio  when  it  api^ears. 
In  the  lirst  place,  not  all  money  is  legal  tender.  In  the 
second  place,  we  lind  the  same  phenomenon  in  connection 
with  "bank-money"  at  times  I  would  refer  especially  to 
the  premium  on  the  marc  haiiko  of  the  Hamburg  Giro- 
bank. (C/.  Knapj).  Slaatlichc  T/icoric  des  Gcldes.  p.  136.) 
The  legal  tender  iwculiarity  may,  however,  in  special  cir- 
cumstances be  a  source  of  a  very  considerable  temporary 
agio. 

It  is  jwssible.  however,  to  frame  a  h.vpothetical  case  in 

which,  barring  temjMirary  emergencies,  the  money-use  will 

add  nothing  to  the  value  of  money,  and  in  which  the  whole 

value  of  money  will  come  from  the  value  of  the  commodity 

chosen  as  the  standard  of  values.   Assume  that  the  standard 

of  value  is  delined  as  a  dollar,  which  is  further  defmed  as 

2,\.22  grains  of  pure  gold.    Assume,  however,  that  no  gold 

is  coined.    Let  the  circulating  money  be  made  of  paper. 

I.(  t  this  i)a|H'r  be  redeemable,  not  in  gold,  but  in  silver,  at 

the  market  ratio,  on  the  day  of  rtflemptic^n,  of  silver  to 

gold.     I  his  will  mean  that  varying  fjuantities  of  silver  will 

be  given  by  the  redeeming  agencies  for  paper,  but  always 

just  that  amount  rcijuired  to  procure  23.22  grains  of  gold. 

Let  us  assume,  further,  that  the  government  issues  paper 

money  freely  on  receipt  of  the  same  amount  of  silver. 

Assume,  further,  that  the  government  bears  the  charges 

whic  h  the  frictittn  of  such  a  system  would  entail,  by  opening 

numerous  centres  of  issue  and  redempUon,  by  providing 

insurance  against  tluctuations  in  the  ratio  of  silver  to  gold 

for  a  reasonable  time  before  issue  and  after  redemption, 

meeting  transportation   charges,  brokerage  fees,  etc.     In 

such  a  case,  the  standard  of  value  would  not  be  used  as 


DODO-BONES 


«5i 


money  at  all.     It  would  have  no  greater  value  than  it 
would  if  it  were  not  the  standard  of  value—abstracting 
from  the  fact  that  in  the  one  case  it  might  be  used  in  its 
uncoined  form  as  a  substitute  for  money  more  freely  than 
in  the  other.    In  any  case,  it  would  form  no  part  of  the 
quantity  of  money.    Its  whole  value  would  come  from  its 
commodity  significance.     The  value  of  the  paper  money, 
however,  would  be  tied  absolutely  to  the  value  of  gold.    As 
gold  rose  in  value,  the  paper  money  would  rise  in  value,  and 
vice  versa.    The  quantity  of  money  would  be  absolutely 
irrelevant  as  affecting  its  value.    The  quantity  of  silver 
would  be  likewise  irrelevant.     The  causation  as  between 
quantity  of  money  and  value  of  money  would  be  exactly 
the  reverse  of  that  asserted  by  the  quantity  theory-.    A  high 
value  of  money  would  mean  lower  prices.     With  lower 
prices,  less  money  would  be  needed  to  carry  on  the  business 
of  the  country.    Paper  would  then  be  superabundant.    But 
in  that  case,  paper  would  rapidly  be  sent  in  for  redemp- 
tion, and  the  quantity  of  money  would  be  reduced.'    The 
value  of  money  would  control  the  quantity  of  money. 
The  standard  of  value,  which  was  not  the  medium  of  ex- 
change, would  control  the  value  of  money,  and  so  the  level 
of  prices,  in  so  far  as  the  level  of  prices  is  controlled  from  the 
money  side. 

In  this  hypothetical  illustration,  we  have  the  extreme 
case  of  what  the  Commodity  or  Metallist  School  seems  to 
assert.  In  this  case,  barring  temporary  emergencies  too 
acute  to  admit  of  increasing  the  money-supply  by  the 
method  described,  their  theory  that  the  value  of  money 
comes  wholly  from  the  commodity  value  of  the  standard, 
would  offer  a  complete  explanation.  I  offer  this  illustration 
as  the  antithesis  of  the  dodo-bone  illustration  of  Nicholson. 

•  Cf.  Profcss«»r  Taussig's  account  of  expansions  and  contractions  of  the 
silver  cunency  in  his  Silver  Situation,  passim. 


«s» 


THE   VALUE  OF   MONEY 


Pf 

»f 
i: 


ill 


That  illustrution  sets  forth  the  extreme  claim!-,  of  the  quan- 
tity theory,  and  purports  to  be  a  case  in  which  the  quantity 
theor>-  would  work  jK-rfectly.  The  case  illustrative  of  the 
commodity  theory  clearly  brings  out  the  fact  that  that 
theory  rests  on  exclusive  attention  to  the  standard  of  value 
function  of  money.  The  dodo-bone  theory  gives  exclusive 
attention  to.  but  very  imperfect  analysis  of,  the  medium 
of  exchange  function.  But  I  submit  that  the  extreme  case 
of  the  commixlity  theory,  in  the  illustration  I  have  given, 
is  a  thinkable  and  consistent  system.  It  wouki  work 
even  though  not  conveniently.  Indeetl.  it  resembles  in 
essentials  the  plan  actually  projMJsed  by  Aneurin  Williams, 
an<l  later  by  Professor  Irving  Fisher  '  for  stabilizing  the 
value  of  money.  Substitute  a  composite  commodity  for 
gold,  and  gold  for  silver,  in  the  illustration,  and  you  have  the 
essentials  of  that  plan.  The  d(Klo-bone  hypothesis,  how- 
ever, as  I  have  been  at  elaborate  pains  to  show  in  the  fore- 
going, is  unthinkable.  It  woukI  not  work.  It  is.  thus. 
j)ossible  to  construct  a  system  for  which  the  commotiity 
theory  would  ofTer  a  complete  explanation.  It  is  not  pos- 
sible to  do  this  for  the  quantity  theory. 

But  tht  limiting  ca.se  for  the  commwlity  theorj'  is  not  the 
actual  ca:^e.  Standard  money  is  also  commonly  a  medium 
of  exchange.  Standard  money  is  particularly  desirable  in 
bank  and  government  rc'ser\es.  Its  employment  in  thest- 
and  other  ways  is  a  valuable  employment,  and  adds  directly 
to  its  value  both  as  money  and  in  the  arts.  There  is  a  margi- 
nal cfjuilibrium  between  its  values  in  the  two  empk))Tnents. 
The  notion  that  the  only  way  in  which  the  money  employ- 
ment adds  to  the  value  of  money  is  an  indirect  one,  by 
withdrawing  gold  from  the  arts,  so  lessening  its  supply  and 
raising  its  value  there,  may  be  proved  erroneous  by  this 
consideration:  what,   in   that   case,   would   determine  the 

'  lor  biblioKraphy,  ^st•l■  Am.  Juon.  Kn\,  Det.,  1914,  pp.  8j8-8.?9. 


DODO- BONES 


I5.J 


margin  iH'twtin  the  two  employments?  What  force  would 
there  Ix'  to  withdraw  gold  from  the  arts  al  all.-'  Why  should 
more  rather  than  less  be  withdrawn?  There  must  be 
ascending  curves  on  both  sides  of  the  margin.  Gold  money 
in  small  amount  has  a  high  significance  per  unit  in 
the  money  employment.  A  greater  amount  has  a  smaller 
significance  iK-r  unit.  The  marginal  amount  of  gold  put 
tt)  work  as  money  has  a  comparatively  low  .significance  in 
that  employ-ment— a  significance  just  great  enough  to  se- 
cure it  from  the  competing  employments  in  the  arts. 

We  conclude,  then,  that  money  must  have  value  to  start 
with,  from  some  source  other  than  the  money  function, 
and  that  there  must  always  be  some  source  of  value  apart 
from  the  money  function,  if  money  is  to  circulate,  or  to 
serve  as  money  in  other  ways.  But  this  is  not  to  assert  the 
doctrine  of  the  commodity  school,  that  its  value  must  arise 
from  the  metal  of  which  it  is  made,  or  in  which  it  is  expected 
to  be  redeemed.  Nor  is  it  to  deny  that  the  money  function 
may  add  to  the  original  value.  ( )n  the  contrary,  the  service^ 
which  money  performs  are  valuable  services,  and  add  di- 
rectly, under  conditions  which  we  shall  analyze  more  fully 
in  a  later  chapter  on  the  functions  of  money,  to  the  value 
deriveil  from  non-pecuniary  sources.  Value  is  not  physical, 
but  psychical.  And  value  is  not  bound  up  inseparably 
with  labor-pain  or  marginal  utility. 


CHAPTKR  VIII 


THE  "EQUATION  OF  EXCHANGE" 

In  Professor  Irving  Fisher's  Purchasing  Pouvr  of  Money  ' 
wc  have  the  most  uncompromising  and  rigorous  statement 
of  the  quantity  theory  to  be  found  in  mixlern  economic 
literature.  We  have,  too,  a  l)ook  which  follows  the  logic 
of  the  (juantity  theory  more  consistently  than  any  other 
work  with  which  I  am  acquainted.  The  book  deals  with 
the  theory  more  elaliorately  and  with  more  detail  than  any 
other  single  volume,  and  ^ums  up  most  of  what  other  writers 
have  had  to  say  in  defence  of  the  quantity  theory.  Pro- 
fessor Fisher's  book  has,  moreover,  received  such  enthusi- 
astic recognition  from  reviewers  and  others  as  to  justify 
one  in  treating  it  as  the  "ofiicial "  exiK)sition  of  the  quantity 
theory.  Thus,  Sir  David  Barbour  cites  Professor  Fisher 
as  the  authority  on  whom  he  relies  for  such  justification 
of  the  theory  as  may  be  needed,-  while  Professor  A.  C. 
Whitaker  tleclares  that  he  adopts  "without  qualification 
the  whole  Inwly  of  general  monetary  theory  "  for  which 
Professor  Fisher  stands.'  Profes.sor  J.  H.  Hollander  has 
recently  referred  to  Professor  Fisher's  work  on  money  and 
prices  as  a  model  of  that  combination  of  theory  and  induc- 
tive verification  which  constitutes  real  science.^  The  Atner- 
lain  Economic  Rnirw  presents  as  an  annual  feature  Pro- 
fessor Fisher's  "  Kquation  of  Exchange." 

'  New  York,  igii.    All  afirinccs  to  this  l)o<)k  in  the  [)resent  volume  are 
to  the  IV 1}  edition,  which  rontuins  some  new  matter. 

*  Slandiird  of  Wilur,  ljin<ion,  loi .',  j>.  4,S,  n. 

'  /'iifirrs  ami  Prmirdings,  Supplement  to  .Manh,  lyi?,  number  of  Anuri- 
can  l:ii»t.  Rnii',.\  |).  1,51. 

*  Amrricaii  luoii.  Kn:,  .Supplement  t(»  March,  iqi6,  nunilnT,  p.  ij8. 

IS4 


THE  "EQUATION  OF  EXCIIANOE 


^SS 


Not  all,  by  any  means,  of  those  who  would  call  them- 
selves quantity  theorists  woul(!  concur  in  Professor  1  isher's 
version  of  the  doctrine— Professor  Taussig,  notably,  in- 
troduces so  many  qualifications,  and  admits  so  many  ex- 
ceptions, that  his  (liKtrine  seems  to  the  present  writer  like 
Professor  Fisher's  chiofly  in  name.    But  there  is  no  other 
one  book  which  could  be  chosen  which  would  serve  neariy 
as  well  for  the  ''platform"  of  present-day  quantity  theor- 
rists  as  The  Purchasing  Power  of  Money.    Partly  for  that 
reason,  and  partl>   because  the  book  lends  itself  well  to 
critical  analysis,  I  shall  follow  the  outline  of  the  book  in 
my  further  statement  and  criticism  of  the  quantity  theory, 
indicating  Professor  Fisher's  views,  and   indicating  the 
poinU  at  which  other  expositions  of  the  quantity  theory 
diverge  from  his,  setting  his  views  in  contrast  with  those 
of  other  writers.    We  shall  find  that  this  method  of  dis- 
cussion will  furnish  a  convenient  outline  on  which  to  pre- 
sent our  final  criticisms  of  the  quantity  theory,  and  parts 
of  the  constructive  doctrine  of  the  present  book. 

First,  Professor  Fisher  presents  in  the  baldest  possible 
form  the  dodo-ljonc  doctrine.  The  quality  of  money  is 
irrelevant.  The  sole  question  of  importance  is  as  to  its 
quantity— the  number  of  money-units.'  I  shall  not  here 
discuss  this  point,  as  a  previous  chapter  has  given  it  ex- 
tended analysis,  except  to  repeat  that  it  is  in  fact  an  essen- 
tial part  of  the  cjuantity  theory.  If  the  quality  of  money 
is  a  factor,  a  necessary  factor,  to  consider,  then  obviously 
we  have  something  which  will  disturb  the  mechanical  cer- 
tainty of  the  quantity  theory.  Professor  Fisher  is  thor- 
oughly consistent  with  the  spirit  of  his  general  doctrine  on 

this  point. 

Second,  Professor  Fisher  has  no  absolute  value  in  his 
scheme.    By  the  value  of  money  he  means  merely  its  pur- 
*L»c.  cit.,  pp.  ji-ji. 


MICROCOPY   RECC'UTION   TEST   CHART 

(ANSI  ond  ISO  TEST  CHART  No    2) 


1.0 


I.I 


1.25 


1^ 

140 


1.4 


2.5 

12.2 

2.0 
1.8 


1.6 


A  /APPLIED  IM/IGE     Inc 

^5-^  1653   East    Mn^r   SIreel 

S",^  Rochester.    Ne,.    York        14609       USA 

"«^S  (716)   *B2  -  0300  -  Phone 

^S  ("6)   288  -  5939  -  Fa» 


I  .-6 


THK    VALUE   OF   MONEY 


chasing  power,  and  by  its  purchasing  power  he  means 
nothing  more  than  the  fact  that  it  does  purchase:  the  pur- 
chasing power  of  money  is  defined  as  the  reciprocal  of  the 
level  of  prices,  "so  that  the  study  of  the  purchasing  power 
of  money  is  identical  with  the  study  of  price  levels."  {Loc. 
cit.,  p.  14.)    In  this,  again,  Professor  Fisher  is  absolutely 
true  to  the  spirit  and  logic  of  the  quantity  theory  doctrine. 
The  equilibration  of  numbers  of  goods,  and  numbers  of 
dollars,  in  a  mechanical  scheme,  gives  prices — an  average 
of  prices,  and  nothing  else.    Any  psychological  values  of 
goods  or  of  dollars  would  upset  the  mechanism,  and  mess 
things  up.     They  are  properly  left  out,  if  one  is  to  be  happy 
with  the  quantity  theory.    Fisher,  in  discussion  of  Kem- 
merer's  Money  and  Credit  Instruments,  has  criticised  the 
exposition  of  the  utility  theory  of  value  with  which  Kem- 
merer  prefaces  his  exposition  of  the  quantity  theory,   as 
"fifth  wheel."    I  agree  thoroughly  with  Fisher's  view  in 
this,  and  would  add  that  the  only  reason  that  it  has  made 
Kemmerer  little  trouble  in  the  development  of  his  quantity 
theory  is  that  he  has  made  virtually  no  use  of  it  there! 
The  two  bodies  of  doctrine,  in  Kemmerer's  exposition,  are 
kept,  on  the  whole,  in  separate  chapters,  well  insulated. 
Coupled  with  this  purely  relative  conception  of  the  value 
of  money,  however,  there  is,  in  Fisher's  scheme,  an  effort 
to  get  an  absolute  out  of  it:  the  general  price-level  is  de- 
clared to  be  independent  of,  and  causally  prior  to,'  the  par- 
ticular prices  of  which  it  is  an  average.    I  mention  this  re- 
markable doctrine  here,  reserving  its  discussion  for  a  later 
chapter. - 

A  further  feature  of  Professor  Fisher's  system,  to  which 
especial  attention  must  be  given,  is  the  large  role  played 
in  it  by  the  "equation  of  exchange."  This  device  has  been 
used  by  other  writers  before  him,  notably  by  Neucomb, 

'  Loc.  cit.,  i>p.  1 7  jfl".  2  •'  The  Passivencss  of  I'riccs,"  infra. 


THE   "EQUATION  OF   EXCHANGE 


I.S7 


Hadley,  and  Kemmercr,  receiving  at  the  hands  of  the  last 
named    an   elaborate   analysis.     But   Fisher,    basing   his 
work  on  Kemmerer's,  has  made  even  more  extensive  use 
of  the  "equation  of  exchange,"  and  has  given  it  a  form 
which  calls  for  special  consideration.'      The  "equation 
of  exchange,"  on  the  face  of  it,  makes  an  exceedingly  simple 
and  obvious  statement.    Properly  interpreted,  it  is  a  per- 
fectly harmless — and,  in  the  present  writer's  opinion,  use- 
less— statement.     It  gives  rise  to  complications,  hc^wever, 
as  to  the  meaning  of  the  algebraic  terms  employed,  which 
we  shall  have  to  study  with  care.    The  starting  point  is 
a  single  exchange:  a  person  buys  lo  pounds  of  sugar  at 
seven  cents  a  pound.    "This  is  an  exchange  transaction  in 
which  lo  pounds  of  sugar  have  been  regarded  as  equal  to 
70  cents,  and  this  fact  may  be  expressed  thus:  70  cents  =10 
pounds  of  sugar  multiplied  by  7  cents  a  pound.    Every 
other  sale  and  purchase  may  be  expressed  similarly,  and 
by  adding  them  all  together  we  get  the  equation  of  ex- 
change for  a  certain  period  in  a  given  community. '''  -    The 
money    employed    in    these    transactions   usually    serves 
several  times,  and  hence  the  money  side  of  the  equation  is 
greater  than  the  total  amount  of  money  in  circulation.    In 
the  preliminary  statement  of  the  equation  of  exchange, 
foreign  trade,  and  the  use  of  anything  but  money  in  ex- 
changes are  ignored,  but  later  formulations  of  the  equa- 
tions are  made  to  allow  for  them.    "The  equation  of  ex- 
change is  simply  the  sum  of  the  equations  involved  in  all 
individual  exchanges  in  a  year.  .  .  .  And  in  the  grand 
total  of  all  exchanges  for  a  year,  the  total  money  paid  is 
equal  in  value  to  the  total  value  of  the  goods  l)ought.     The 
equation  thus  has  a  money  side  and  a  goods  side.     The 


'  Particularly  in  view  of  the  elalwratt-  stalistiis.  to  l)c  considered  below, 
with  whii  h  it  is  sought  to  muke  the  equation  realistic. 
» Loc.  cil.,  p.  lOff. 


itL^ 


.■I 


IS8 


THE  VALUE   OF  MONEY 


money  side  is  the  total  money  paid,  and  may  be  considered 
as  the  product  of  the  quantity  of  money  multiplied  by  its 
rapidity  of  circulation.  The  goods  side  is  made  up  of  the 
products  of  quantities  of  goods  exchanged  multiplied  by 
their  respective  prices." 

Letting  M  represent  quantity  of  money,  and  V  its  veloc- 
ity or  rapidity  of  circulation,  p,  p',  p",  etc.,  the  average 
prices  for  the  period  of  different  kinds  of  goods,  and  Q,  Q', 
Q",  etc.,  the  quantities  of  different  kinds  of  goods,  we  get 
the  following  equation: 

MV  =  pQ  +  p'Q'  +  p"Q"  +  etc' 

"The  right-hand  side  of  this  equation  is  the  sum  of  terms  of 
the  form  pQ — o.  price  multipUed  by  the  quantity  bought."^ 
The  equation  may  then  be  written, 

MV  =  2  pQ  (Sigma  being  the  symbol  of  summation). 
The  equation  is  further  simplified  ^  by  rewriting  the  right- 
hand  side  as  PT,  where  P  is  the  weighted  average  of  all  the 
p's,  and  T  is  the  sum  of  all  the  Q's.  "P  then  represents  in 
one  magnitude  the  level  of  prices,  and  T  represents  in  one 
magnitude  the  volume  of  trade." 

It  may  seem  like  captious  triviality  to  raise  questions  and 
objections  thus  early  in  the  exposition  of  Professor  Fisher's 
doctrine.  And  yet,  serious  questions  are  to  be  raised. 
First,  in  what  sense  is  there  an  equality  between  the  ten 
pounds  of  sugar  and  the  seventy  cents?  Equality  exists 
only  between  homogeneous  things.  In  what  sense  are 
money  and  sugar  homogeneous?  From  my  own  stand- 
point, the  answer  is  easy:  money  and  sugar  are  alike  in 
that  both  are  valuable,  both  possess  the  attribute  of  eco- 
nomic social  value,  an  absolute  quality  and  quantity.  The 
degree  in  which  each  possesses  this  qualitj'^  determines 
the  exchange  relation  between  them.    And  the  degree  in 

•  Loc.  cil.,  |).  25.  *  Ibid.,  p.  26.  '  Ibid.,  p.  27. 


THE   "equation   OF  EXCHANGE" 


159 


which  each  other  good  possesses  this  quality,  taken  in  con- 
junction with  the  value  of  nioney,  determines  every  other 
particular  price.  Finally,  an  average  of  these  particular 
prices,  each  determined  in  this  way,  gives  us  the  general 
price-level.  The  value  of  the  money,  on  the  one  hand, 
and  the  values  of  the  goods  on  the  other  hand,  are  both  to 
be  explained  as  complex  social  psychological  forces.  But 
when  this  method  of  approach  is  used,  when  prices  are 
conceived  of  as  the  results  of  organic  social  psychological 
forces,  there  is  no  room  for,  or  occasion  for,  a  further  ex- 
planation in  terms  of  the  mechanical  equilibration  of  goods 
and  money.  Professor  Fisher,  as  just  shown,  very  care- 
fully excludes  this  and  all  other  psychological  approaches 
to  his  problem  of  general  prices,  and  has  no  place  in  his 
system  for  an  absolute  value.  In  wha^  sense,  then,  are 
the  sugar  and  the  money  equal?  Professor  Fisher  says 
(p.  17),  that  the  equation  is  an  equation  of  values.  But 
what  does  he  mean  by  values  in  this  connection?  Perhaps 
a  further  question  may  show  what  he  must  mean,  if  his 
equation  is  to  be  intelligible.  That  question  is  regarding 
the  meaning  of  T. 

T,  in  Professor  Fishers  equation,  is  defined  as  the  sum 
of  all  the  Q's.  But  how  does  one  sum  up  pounds  of  sugar, 
loaves  of  bread,  tons  of  coal,  yards  of  cloth,  etc.?  I  find  at 
only  one  place  in  Professor  Fisher's  book  an  effort  to  answer 
that  question,  and  there  it  is  not  clear  that  he  means  to 
give  a  general  answer.  He  needs  units  of  Q  which  shall  be 
homogeneous  when  he  undertakes  to  put  concrete  figures 
into  his  equation  for  the  purpose  of  comparing  index  num- 
bers and  equations  for  successive  years.  "If  we  now  add 
together  these  tons,  pounds,  bushels,  etc.,  and  call  this 
grand  total  so  many  'units'  of  commodity,  we  shall  have 
■4  very  arbitrary  sumniation.  It  will  make  a  difference, 
for  instance,  whether  we  measure  coal  by  tons  or  hundred- 


!il 


1 60 


TIIE   VAI.UK    OF   xMONF-Y 


weights.  The  system  becomes  less  arbitrary  if  we  use,  as 
the  unit  for  measuring  an\'  goods,  nt)t  the  unit  in  which  it 
is  commoni}'  sold,  but  the  amount  which  constitutes  a 
'dollar's  worth'  at  some  particular  year  called  the  base 
year"  (p.  196).  If  this  be  merely  a  device  for  the  purpose 
of  handlmg  index  numbers,  a  convention  to  aid  mensura- 
tion, we  need  not.  perhaps,  challenge  it.  The  unit  chosen 
is,  in  that  case,  after  all  a  fixed  physical  quantity  of  goods, 
the  amount  bought  with  a  dollar  in  a,  given  year,  and  re- 
mains fixed  as  the  prices  vary  in  subsequent  years.  That 
it  is  more  "philosophical"  or  less  "arbitrary"  than  the 
more  common  units  is  not  clear,  but,  if  it  be  an  answer,  de- 
signed mereh-  for  the  particular  purpose,  and  not  a  gen- 
eral answer,  it  is  aside  from  my  purpose  to  criticise  it  here. 
If,  however,  this  is  Professor  Fisher's  general  answer  to  the 
question  of  the  method  of  summing  up  T,  if  it  is  to  be  em- 
ployed in  his  equation  when  the  question  of  causation,  as 
distinguished  from  mensural  ion,  is  involved,  then  it  repre- 
sents a  vicious  circle.  If  T  involves  the  price-level  in  its 
definition,  then  T  cannot  be  used  as  a  causal  factor  to  ex- 
plain the  price-level.  I  shall  not  undertake  to  give  an 
answer,  where  Professor  Fisher  himself  fails  to  give  one, 
as  to  his  meaning.  I  simply  point  out  that  he  himself 
recognizes  that  the  summation  of  the  Q's  is  arbitrary  with- 
out a  common  unit,  and  that  the  only  common  unit  sug- 
gested in  his  book,  if  applied  generally,  involves  a  vicious 
circle. 

What,  then,  is  T?  Perhaps  another  question  will  aid 
us  in  answering  this.  What  does  it  mean  to  multiply  ten 
I)ounds  of  sugar  by  seven  cents?  What  sort  of  product 
results?  Is  the  answer  seventy  pounds  of  sugar,  or  seventy 
cents,  or  some  new  two-dimensional  hybrid?  One  mul- 
tij)lies  feet  by  feet  to  get  square  feet,  and  square  feet  by 
feet  to  get  cubic  feet.     But  in  general,  the  multiplication 


THE       EQUATION   OF   EXCHANGi; 


l6l 


of  concrete  quantities  by  concrete  quantities  is  meaningless. ' 
One  of  the  generalizations  of  elementary  arithmetic  is  that 
concrete  quantities  may  usually  be  multii)lied,  not  by  other 
concrete  quantities,  but  rather  by  abstract  quantities,  pure 
numbers.  Then  the  product  has  meaning:  it  is  a  concrete 
quantity  of  the  same  denomination  as  the  multiplicand. 
If  the  Q's,  then,  are  to  be  multiplied  by  their  respective 
p's,  the  Q's  must  be  interpreted,  not  as  bushels  or  pounds 
or  yards  of  concrete  goods,  but  merely  as  abstract  numbers. 
And  T  must  be,  not  a  sum  of  concrete  goods,  but  a  sum  of 
abstract  numbers,  and  so  itself  an  abstract  number.  Thus 
interpreted,  T  is  equally  increased  by  adding  a  hundred 
papers  of  pins,-  a  hundred  diamonds,  a  hundred  tons  of 
copper,  or  a  hundred  newspapers.  This  is  not  Professor 
Fisher's  rendering  of  T,  but  it  is  the  only  rendering  which 
makes  an  intelligible  equation. 

We  return,  then,  to  the  question  with  which  we  set  out: 
in  what  sense  is  there  an  equality  between  the  two  sides  of 
Professor  Fisher's  equation?  The  answer  is  as  follows: 
on  one  side  of  the  equation  we  have  M,  a  quantity  of  money, 
multiplied  by  V,  an  abstract  number;  on  the  other  side  of 
the  equation,  we  have  P,  a  quantity  of  money,  multiplied 
by  T,  an  abstract  number.  The  product,  on  each  side,  is 
a  sum  of  money.  These  sums  are  equal.  They  are  equal 
because  they  are  identical.  The  equation  asserts  merely 
that  what  is  paid  is  equal  to  what  is  received.  This  propo- 
sition may  require  algebraic  formulation,  but  to  the  present 
writer  it  does  not  seem  to  require  any  formulation  at  all. 
The  contrast  between  the  "money  side"  and  the  "goods 
side"  of  the  equation  is  a  false  one.  There  is  no  goo^ls  side. 
Both  sides  of  the  equation  are  money  sides.     I  repeat  that 

'  VV'hero  it  is  not  meanin)'li'ss,  as  at  various  ix)ints  in  the  theory  of  nic- 
ciianics,  the  prixiuct  is  a!wa\  s  of  a  cliifurfnl  denomination  from  either  lai  lor. 

^  Vide  our  ch.  on  "Supply  and  Demand,"  supra,  for  a  discussion  of  Mill's 
doctrine  as  to  the  "demand"  for  money. 


if 


rit 


162 


THE  VALUE  OF  MONEY 


this  is  not  Professor  Fisher's  interpretation  of  his  equation. 
But  it  seems  the  only  interpretation  which  is  defensible. 

A  further  point  must  be  made:  Sigma  pQ,  where  the  Q's 
are  interpreted  as  abstract  numbers,  is  a  summary  of  con- 
crete money  pajTnents,  each  of  which  has  a  causal  explana- 
tion, and  each  of  which  has  effected  a  concrete  exchange. 
Mathematically,  PT  is  equal  to  SpQ,  just  as  3  times  4 
is  equal  to  2  times  6.  But  from  the  standpoint  of  the 
theor>^  of  causation,  a  vast  difference  is  made.  Three 
children  four  feet  high  equal  in  aggregate  height  two  men 
six  feet  high.  But  the  assertion  of  equality  between  the 
three  children  and  the  two  men  represents  a  high  degree 
of  abstraction,  and  need  not  be  significant  for  any  given 
purpose.  Similarly,  the  restatement  of  SpQ  as  PT.  One 
might  restate  2pQ  as  PT,  defining  P  as  the  sum  (instead  of 
the  average)  of  the  p's,  and  T  as  the  weighted  average  (In- 
stead of  the  sum)  of  the  Q's.  Such  a  substitution  would 
be  equally  legitimate,  mathematically,  and  the  equation, 
MV  =  PT  equally  true.  SpQ  might  be  factorized  in  an 
indefinite  number  of  ways.  But  it  is  important  to  note 
that  in  PT,  as  defined  by  Professor  Fisher,'  we  are  at  three 
removes  from  the  concrete  exchanges  in  which  actual  con- 
crete causation  is  focused:  we  have  first  taken,  for  each  com- 
modity, an  average,  for  a  period,  say  a  year,  of  the  concrete 
prices  paid  for  a  unit  of  that  commodity,  and  multiplied  that 
average  by  the  abstract  number  of  units  of  that  commod- 
ity sold  in  that  year;  we  have  then  summed  up  all  these 
products  into  a  giant  aggregate,  in  which  we  have  mingled 
hopelessly  a  mass  of  concrete  causes  which  actually  affected 
the  particular  prices;  then,  finally,  we  have  factorized  this 
giant  composite  into  two  numbers  which  have  no  concrete 
reality,  namely,  an  average  of  the  averages  of  the  prices,  and 

'  What  is  here  said  of  Fisher's  equation  of  exchange  applies,  for  the  most 
part,  to  all  versions  of  it. 


THE 


"equation  of  exchange" 


163 


a  sum  of  the  abstract  numbers  of  the  sums  of  the  goods  of 
each  kind  sold  in  a  given  year — a  sum  which  exists  only  as  a 
pure  number,  and  which,  consequently,  is  unlikely  to  be  a 
causal  factor!  It  may  turn  out  that  there  is  reason  for  all 
this,  but  if  a  causal  thcor>'  is  the  object  for  which  the  equa- 
tion of  exchange  is  designed,  a  strong  presumption  against 
its  usefulness  is  raised.  Both  P  and  T  are  so  highly  abstract 
that  it  is  improbable  that  any  significant  statements  '-an 
be  made  of  either  of  them.  As  concepts  gain  in  generality 
and  abstractness,  they  lose  in  content;  as  they  gain  in 
"extension"  they  lose  (as  a  rule)  in  "intension."  On  the 
other  side  of  the  equation,  we  also  look  in  vain  for  a  truly 
concrete  factor,  V,  the  average  velocity  of  money  for  the 
year,  is  highly  abstract.  It  is  a  mathematical  summary 
of  a  host  of  complex  activities  of  men.  Professor  Fisher 
thinks  that  V  obeys  fairly  simple  laws,  as  we  shall  later  see, 
but  at  least  that  point  must  be  demonstrated.  Even  M 
is  not  concrete.  At  a  given  moment,  the  money  in  circula- 
tion is  a  concrete  quantity,  but  the  average  for  the  year  is 
abstract,  and  cannot  claim  to  be  a  direct  causal  factor, 
with  one  uniform  tendency.  Of  course  Professor  Fisher 
himself  recognizes  that  his  central  problem  is,  not  to  state 
and  justify,  mathematically,  his  equation  * — that  is  a  work 
of  supererogation,  and  the  statistical  chapters  devoted  to 
it  seem  to  me  to  be  largely  wasted  labor.  Professor 
Fisher  recognizes  that  his  central  problem  is  to  establish 
catisal  relations  among  the  factors  in  his  equation  of  ex- 
change. It  is  from  the  standpoint  of  its  adaptability  as  a 
tool  in  a  theory  of  causation  that  I  have  been  considering 
it.  It  should  be  noted  that  "volume  of  trade,"  as  fre- 
quently used,  means  not  niunbers  of  goods  sold,  but  the 
money-price  of  all  the  goods  exchanged,  or  PT.    It  is  in 


'  Lcc.  cil.,  p.  298.   Cf.  our  chapter,  infra,  on  "  Sutistical  Demonstrations 
of  the  Quantity  Theory." 


1 1 


It 
1 1 


164 


THE   VM-II'.   or    MONF.Y 


this  sense  of  "trade"  that  h.»nk-clea rings  arc  supposed  to 
lie  an  index  of  volume  of  trade.     'Ihe  sund  ring  of  the  p's 
and  Q's  really  is  a  hig  a>sumption  of  many  of  the  points  at 
issue.     Indeed,  it  is  al)so!utely  impossible  to  sunder  PT. 
It  is  always  the  p  aspect  of  the  thing  that  is  significant, 
Fisher  himself  linally  interprets  T,  statistically,  as  billions 
of  dollars.^     As  a  matter  of  mathematical  necessity,  either 
P  must  be  defined  in  terms  of  T  or  T  defined  in  terms  of  P. 
The  V's  and  M  and  M'  may  be  independently  defined,  and 
arbitrary  numbers  may  be  assigned  for  them  limited  only 
by  the  necessity  that  MV+M'V  be  a  fixed  sum.^    But  P 
and  T  cannot,  with  respect  to  each  other,  be  thus  inde- 
{)endently  defined.    The  highly  artificial  character  of  T 
has  been  pointed  out  by  Professor  E.  B.  Wilson,  of  the 
Massachusetts  Institute  of  Technology,  in  his  review  of 
Fisher's  Purchasing  Power  of  Money  in  the  Bulletin  of  the 
American  Mathematical  Society,  April,  1914.  pp.  377'3^^- 
"Various  consequences  are  readily  obtained  from  the  equa- 
ti>  i\  of  exchange,  but  the  determination  of  the  equation  it- 
self is  not  so  easy  as  it  might  look  to  a  careless  thinker. 
The  difficulties  lie  in  the  fact  that  P  and  T  individually 
are  quite  indeterminate.    An  average  price-level  P  means 
nothing  till  the  rules  for  obtaining  the  average  are  specified, 
and  independent  rules  for  evaluating  P  and  T  may  not 
satisfy  [the  equation.]     For  instance,  suppose  sugar  is  5c. 
a  pound,  bacon  20c.  a  pound,  cofTee  35c.  a  pound.    The 
average  price  is  20c.     If  a  person  buys  10  lbs.  of  sugar,  3 
lbs.  of  bacon,  and  i  lb.  of  cofTee,  the  total  trading  is  in  14  lbs. 
of  goods.    The  total  expenditure  is  $1.45;  the  product  of 
the  average  price  b\-  the  total  trade  is  S2.80;  the  equation 
is  very  far  from  satisfied."    Wilson  thinks  it  necessary,  to 


'  Piircl'usiiiii  Pouer  of  Money,  p.  ZQo. 

2  The  ai.M'Uricd  equation  is  .MV+.M'V'  =  rr,  which  takes  account  of 
bank-credit.    This  is  explained,  infra. 


Tin:    "EQI'ATION   OF  EXCHAM'.F." 


i6S 


make  the  matter  straight,  to  define  T  ar!)itrarily  a» 
Mv  +  M'v  ji^  ^vhith  case,  the  e(iuati()n  is  true,  hut  so  ob- 
\  iously  a  truism  that  no  one  would  see  any  i)oint  in  stat- 
ing it.  T  no  longer  has  any  independent  standing.  Fisher 
has.  however,  an  escape  from  this  status  for  T,  hut  only  by 
reducing  P  to  the  same  ix)sition.  He  defines  P  as  the 
'weighted  average  of  the  p's  (27),  and  fails,  I  think,  to  see 
how  completely  this  ties  it  up  with  T.  The  only  method 
of  weighting  the  p's  that  will  leave  the  equation  straight 
is  to  weight  the  different  prices  by  the  number  of  units  of 
each  kind  of  good  sold,  namely.  T.    Thus,  in  Wilson's 

•  11  ••  I  1    1    r         r»         (5C.XIO)  -KiOc.X.<)  -K.tscXil.     p; 

illustration,  we  would  define  P  as t^is 


•  4 


then  10V14  c,  while  T  is  14.  PT  is,  then,  equal  to  $1.45. 
which  is  the  total  expenditure,  or  MV-f  M'V".  Be  it 
noted,  here,  that  P  is  defined  in  terms  of  T.  /.  g..  P  is  de- 
fined as  a  fraction,  the  denominator  of  which  is  T.  Xo 
other  definition  of  P  will  serve,  if  T  is  to  be  defined  inde- 
pendently. 

But  notice  the  corollary.  P  must  be  differently  defined 
each  year,  for  each  new  equation,  as  T  changes  in  total 
magnitude,  and  as  the  elements  in  T  are  changed.  The 
equation  cannot  be  kept  straight  otherwise.  Suppose  that 
the  prices  remain  unchanged  in  the  next  year,  but  that  one 
more  pound  of  coflfee,  and  two  less  pounds  of  sugar  are  sold. 
P,  as  defined  for  the  equation  of  the  preceding  year  would 
no  longer  fit  the  equation.  P,  as  previously  defined,  would 
he  unaltered,  since  none  of  the  prices  in  it  had  changed. 
P,  defined  as  a  weighted  average  with  the  weights  of  the 
first  year,  would,  then,  still  be  loVu  cents.  The  T  in  the 
new  equation  is  13.  The  product  of  P  and  T  is  $i.34*/i4. 
But  the  total  expenditure,  (MV  +  M'V)  is  $1.70.  The 
equation  is  not  fulfilled.  To  fulfill  the  equation,  it  is  neces- 
sary to  get  a  new  set  of  weights  for  P.  in  terms  of  the  new 
T  of  the  new  equation.    From  the  standpoint  of  a  causal 


t66 


ill! 


i! 


ill! 


i;    i 


J  I 
I  ' 


13 1 


THE  VALUE  OP  MONEY 


theory,  this  is  delightful.  P  is  the  problem.  But  you  are 
not  allowed  to  dt-Jhw  the  problem  until  you  know  what  the 
explanation  is!  Then  you  define  the  problem  as  that  which 
the  explanation  will  explain! 

Fisher,  however,  appears  unaware  of  this.  At  all  events, 
he  does  not  mention  it.  And  he  ignores  it  in  lilling  out  his 
equation  statistically,  for  he  assigns  one  set  of  weights  to 
the  particular  prices  in  his  P  throughout.' 

The  causal  theory  with  which  the  equation  of  exchange 
is  associated  is  as  follows:  P  is  passive.  A  change  in  the 
equation  cannot  be  initiated  by  P.  If  P  should  change 
without  a  prior  change  in  one  of  the  other  factors,  forces 
would  be  set  in  operation  which  would  force  it  back  to  its 
original  magnitude.  M  and  T  are  independent  magni- 
tudes. A  change  in  one  does  not  occasion  a  change  in  the 
other.  An  increase  or  decrease  in  M  will  not  cause  a  change 
in  V.  Therefore,  an  increase  in  M  must  lead  to  a  propor- 
tionate increase  in  P,  and  a  decrease  in  M  to  a  propor- 
tionate decrease  in  P,  if  the  equation  is  to  be  kept  straight. 
Changes  in  T  have  opposite  proportional  eflfects  on  P. 

Before  examining  the  validity  of  the  causal  theory,  and 
the  arguments  by  which  it  is  supported,  it  will  be  best  to 
state  the  more  complex  formula  which  Professor  Fisher 
advances  as  expressing  the  facts  of  to-day.  The  original 
formula  ignored  credit,  and  ignored  the  possibility  of  resort 
to  barter.  It  also  failed  to  reckon  with  certain  complica- 
tions which  Fisher  deals  with  as  "transitional "  rather  than 
"normal." 
The  formula  which  includes  credit  is  as  follows: 
MV  -f  M'V  =  PT 

Here,  MV  and  PT  have  the  same  significance  as  before. 

M'  is  the  average  amount  of  bank-deposits  in  the  given 

'  Lor.  eil.,  p.  .,^7.    I  recur  to  this  point  in  discussing  the  statistics  of  the 
"equation  of  exchange"  in  ch.  19. 


THE   "FgUATION   OF   EXClIANdE 


167 


region  for  the  given  period,  and  V  is  ♦he  velocity  of  circu- 
lation of  those  deposits.    M .  money,  consists  of  all  the  media 
of  exchange  in  circulation  which  are  generally  acceptable, 
as  distinguished  from  those  which  arc  acceptable  under 
particular  conditions,  as  by  endorsement.     M  excludes 
money  in  bank  reserves  and  government  vaults.    Money, 
specifically,  includes  gold  and  silver  coin,  minor  coins, 
government  paper  money,  and  bank-notes;  M'  consists  of 
deposits  transferable  by  check.    This  version  would  not 
satisfy  such  a  writer  as  Nicholson.'  who  would  limit  money 
to  gold  coin,  and  would  include  in  M'  not  only  deposits, 
but  also  bank-notes,  and  other  credit  instruments.    I  may 
suggest  here,  what  I  shall  later  emphasize,  that  Fisher's 
"money,"  though  he  doubtless  b  using  the  most  common 
definition  of  money,  is  really  a  pretty  heterogeneous  group 
of  things,  concerning  which  it  is  possible  to  make  few  general 
statements  safely.    In  economic  essence,  c.  g.,  bank-notes 
are  much  more  like  deposits  than  like  gold,  and  if  one  wishes 
to  separate  money  and  credit,  bank-notes  belong  with  M' 
rather  than  with  M.    But  we  must  take  the  theory  as  we 
find  it!   Again,  credit  is  by  no  means  exhausted  when  bank- 
deposits  are  named.    Why  should  not  book-credits,  and 
bills  of  exchange  be  included?    Why  not  postal  money- 
orders,  why  not  deposits  subject  to  transfer  by  the  giro- 
system?    M'  is  defined  ^  as  "the  total  deposits  subject  to 
transfer  by  check,"  and  would,  thus,  exclude  the  giro- 
system  of  Germany.    It  is  surely  a  very  provincial  equation 
of  exchange,  with  which  Fisher  and  Kemmerer  seek  to  set 
forth  the  universal  laws  of  money!     Fisher's  reason  for 
excluding  book-credits  is  that  book-credits  merely  postpone, 
and  do  nof  dispense  with,  the  use  of  money  and  checks.' 

>  Infra,  rh.  on  "Quantity  Theory  and  World  Prices."      '  Loc.  cit.,  p.  48. 

•  Lor.  cil.,  p.  370.  The  same  position  is  taken  by  Kemmerer,  Money  and 
CredU  Instruments,  pp.  68  et  scq.  Mill  denies  the  vaUdity  of  these  distinc- 
tions.   See  Principles,  Bk.  Ill,  ch.  12,  Par.  8. 


1 68 


THE   VALUE   OF   MONEY 


H 


i;l 


Book-credits,  unlike  deposits,  have  no  direct  effect  on  prices 
{Ibid.,  82,  n.;  370),  but  only  an  indirect  effect,  by  increasing 
the  velocity  of  money.    {Ibid.,  81-82;  370-371.)    Book- 
credit,  indeed  "time-credit"  in  general  thus  has  no  direct 
effect  on  prices,  and  is  properly  excluded  from  the  equation 
of  exchange.    These  distinctions  seem  to  me  highly  artificial. 
In  the  first  place,  the  use  of  checks,  in  part,  merely  post- 
pones the  use  of  money:  money  is  moved  back  and  forth 
from  one  part  of  the  country  to  another,  and  from  one  bank 
to  another,  to  the  extent  that  checks  fail  to  offset  one 
another,  and  in  the  case  of  book-credit,  while  there  is  less 
of  this  offsetting,  there  is  a  good  deal  of  it,  especially 
between  stockbrokers  in  different  cities,  and  in  small  towns 
and  at  country  stores,  and  particularly  in  the  South,  where 
the  country  storekeeper  and  "factor"  are  also  dealers 
in  cotton,  etc.,  and  where  they  advance  provisions  during 
the  year  to  the  small  farmers,  receiving  their  pay,  in  con- 
siderable degree,  not  in  money,  but  in  cotton,  which  they 
ciodit  on  the  books  in  terms  of  money  to  the  customer— a 
point  which  Fisher  mentions  in  an  appendix.   {Ibid.,  p.  37 1 .) 
The  difference  on  this  point  is  a  difference  in  degree  merely.' 
Further,  Fisher  makes  the  same  point  with  reference  to 
deposits  subject  to  check  that  he  makes  with  reference  to 
book-credits,  namely,  that  their  use  increases  the  velocity 
of  money.    To  say  that  one  has  a  direct  effect  on  prices,  and 

'The  above  was  written  before  the  discussion  in  tlie  Annalist  (Feb.  7, 
I-eb.  21,  March  6,  March  1.5,  March  20,  iqi6)  in  which  the  present  writer 
urncd  that  Professor  l-isher  had  Krcatly  exaggerated  the  volume  of  trade 
in  the  United  States  by  taking  l)anking  transactions  as  representative  of 
trade.  In  reply  (see  csiHJcially  the  number  for  Feb.  21,  pp.  245  ct  srq.) 
Profes.sor  Fisher  maintains  that  the  overcounting  to  which  I  call  attention 
IS  offset  by  undcrcounting,  and  conside.s  iffsetting  Ijook-credits,  which 
actually  dispense  with  the  use  of  money  and  checks,  an  important  elemeat 
in  the  unden ounting.  I  am  unable  to  reconcile  this  [xisilion  with  the  reasons 
given  for  excluding  book-credits  from  the  "equation  of  exchange."  A  de- 
laiic.i  (iisiussion  of  the  |H)ints  at  issue  ap|X'ars  in  later  chapters,  jxirticularly 
in  the  chapter  on  "Statistical  Demonstrations  of  the  Quantity  Theory." 


1 


THE   "equation  OF  EXCHANGE' 


i6q 


the  other  only  an  indirect  effect  is  absolutely  arbitrary. 
If  buying  and  selling  arc  what  count,  if  prices  are  forced  up 
by  the  offer  of  money  or  credit  for  goods,  and  forced  down 
as  the  amount  of  money  and  credit  offered  for  goods  is 
reduced,  then  one  exchange  must  count  for  as  much  as  any 
other  of  like  magnitude  in  fixing  prices.  The  same  is  true 
of  transactions  in  which  bills  of  exchange  or  other  credit 
devices  serve  as  media  of  exchange.  Of  course  these  con- 
siderations do  not  render  the  equation  of  exchange,  as 
presented  by  Fisher,  untrue.  The  equation  simply  states 
that  the  money  and  bank-deposits  used  in  paying  for  goods 
in  a  given  period  are  equal  to  the  amount  paid  for  those 
goods  in  a  given  period.  It  makes  no  assertion  concerning 
payments  for  other  goods,  and  makes  no  assertion  as  to  the 
aniount  of  other  transactions  which  are  paid  for  in  other 
ways.  General  Walker,  presented  with  the  problem  of 
credit  phenomena,  simplifies  the  thing  even  more.*  He 
rules  out  all  exchanges  which  are  effected  by  credit  devices, 
counting  only  those  performed  by  -oin,  bank-notes  and 
goverrmient  paper  money,  and  insists  that  the  general  price- 
level  is  determined  in  those  exchanges  in  which  money 
alone  (as  thus  defined)  is  employed.  His  equation — if  he 
had  considered  it  worth  whik  to  use  one — would  then  have 
been  simply 

MV  =  PT 


where  T  would  be  merely  the  number  of  goods  exchanged 
by  means  of  money.  One  could  make  a  similar  equation, 
equally  true,  by  defining  money  as  gold  coin,  and  reducing 
T  correspondingly.  Is  there  any  reason  for  limiting  the 
equation  at  all?  ^    Is  there  any  reason  for  supposing  that 

•  Quarterly  Journal  of  Rroncnicx,  vols.  8  and  q;  Political  Fxonomy,  pp.  169- 
17s;  Money,  chs.  3-8. 
2  In  our  analysis  of  bank-loans,  infra,  we  shall  find  reason  to  hold  that 


PHf: 


! 


170 


THE  VALUE   OF  MONEY 


any  one  set  of  exchanges  is  more  significant  for  the  determi- 
nation of  the  price-level  than  any  other  set  of  exchanges? 
Does  not  the  logic  of  the  quantity  theory  require  us  to  in- 
clude all  exchanges  which  run  in  terms  of  money?— If  one 
wishes  a  complete  picture  of  the  exchanges,  some  such 
equation  as  this  would  be  necessary: 

MV  +  M'V  -I-  BV"  +  EV" '  -f  OV"  "  =  PT, 

where  B  represents  book-credit,  V"  the  number  of  times  a 
given  average  amount  of  book-credit  is  used  in  the  period, 
E  bills  of  exchange,  and  Y"  their  velocity  of  circulation, 
and  O  all  other  substitutes  for  money,  with  V""  as  their 
velocity  of  circulation.  Even  then  we  have  not  a  complete 
picture,  if  direct  barter  or  the  equivalents  of  barter  can  be 
shown  to  be  important. 

For  the  present,  I  waive  a  discussion  of  the  comparative 
importance  of  these  different  methods  of  conducting  ex- 
changes. The  situation  varies  greatly  with  different  coun- 
tries. Fisher's  and  Kemmerer's  equations  are  at  best 
plausible  when  presented  as  describing  American  condi- 
tions, are  much  less  plausible  when  applied  to  Canada  and 
England,  and  are  caricatures  when  applied  to  Germany 
and  France. 

So  much  for  the  statement  of  the  equation  of  exchange, 
except  that  it  is  important  to  add  that  the  period  of  time 
chosen  for  the  equation  is  o'le  year.  Just  why  a  year, 
rather  than  a  month  or  two  years  or  a  decade  should  be 
chosen,  may  await  full  discussion  till  later.  I  shall  venture 
here  the  opinion  that  the  yearly  period  is  not  the  period  that 
should  have  been  chosen  from  the  standpoint  of  Fisher's 

Walker,  though  false  to  the  logic  of  the  quantity  theory,  conies  nearer  to 
a  tenable  doctrine  than  do  Kemmerer,  Fisher,  Andrew,  and  most  other 
quantity  theorists. 


THE 


"equation  of  exchange" 


171 


causal  theory,  and  that  it  probably  was  chosen,  if  for  any 
conscious  reason  at  all,  because  of  the  fact  that  statistical 
data  which  Fisher  wished  to  put  into  it  are  commonly 
presented  as  annual  averages.  The  question  now  is,  how- 
ever, as  to  the  use  to  be  made  of  the  equation  in  the  de- 
velopment of  a  causal  theory. 


CHAPTER  IX 

THE  VOLUME  OF  MONEY  AND  THE  VOLUME  OF 

CREDIT 


&i.d.i 


John  Stuart  Mill,  who  first  among  the  great  figures 
in  economics  gives  a  realistic  analysis  of  modern  credit 
phenomena,  thought  that  credit  acts  on  prices  in  the  same 
way  that  money  itself  does*  and  that  this  reduces  the  signifi- 
cance of  the  quantity  theory  tendency  greatly,  and  to  an 
indeterminate  degree.  The  quantity  theory  is  largely 
whittled  away  in  Mill's  exposition  of  the  influence  of  credit. 
In  Fisher  we  have  a  much  more  rigorous  doctrine.  The 
quantity  of  money  still  governs  the  price-level,  because  M 
governs  M'.  The  volume  of  bank-deposits  depends  on  the 
volume  of  money,  and  bears  a  pretty  definitely  fixed  ratio 
to  it.  Just  how  close  the  relation  is.  Professor  Fisher  does 
not  say,  but  the  greater  part  of  his  argument,  especially 
in  ch.  8,-  rests  on  the  assumption  that  the  ratio  is  very 
constant  and  definite  indeed.  At  all  events,  the  importance 
of  the  theory,  as  an  explanation  of  concrete  price-levels, 
will  vary  with  the  closeness  of  this  connection,  and  the 
invariability  of  this  ratio.  It  is  not  too  much  to  say  that 
the  hook  falls  li-ith  this  proposition,  to  wit,  that  M  controls 
M',  and  that  there  is  a  fixed  ratio  between  them.  We  would 
expect,  therefore,  a  very  careful  and  full  demonstration 
of  the  proposition,  a  care  and  fullness  commensurate  with 
its  importance  in  the  scheme.  But  the  reader  will  search 
in  vain  for  any  proof,  and  will  find  only  two  projwsitions 
which  purport  to  be  proof.  These  are:  (i)  that  bank  reserves 


'  /'r i lie i pics,  Bk.  Ill,  chs.  1 1  and  i . 


■  Purclutsing  Paarr  of  Mo  ley. 


172 


THE  VOLUME  OF  MONEY  AND  CREDIT 


I7.i 


are  kept  in  a  more  or  less  definite  ratio  to  bank  deposits;  (2) 
that  individuals,  firms  and  corporations  preserve  more  or 
less  definite  ratios  between  their  cash  transactions  and 
their  check  transactions,  and  between  their  cash  on  hand 
and  their  deposit  balances.' 

If  these  be  granted,  what  follows:  the  money  in  bank- 
rescrves  is  no  ^, ..  t  of  M !  M  is  the  money  in  circulation, 
being  exchang.  a  against  goods,  not  the  money  lying  in 
bank- vaults!  -  The  money  in  bank- vaults  does  not  figure 
in  the  equation  of  exchange.  As  to  the  second  part  of  the 
argument,  if  it  be  granted,  it  proves  nothing.  The  money 
in  the  hands  of  individual  and  corporate  depositors  is  by 
no  means  all  of  M.  It  is  not  necessarily  the  greatest  part. 
The  money  in  circulation  is  largely  used  in  small  retail 
trade,  by  those  who  have  no  bank-accounts.  A  good 
many  of  the  smallest  merchants  in  a  city  like  New  York 
have  no  bank-accounts,  since  banks  require  larger  balances 
there  than  they  can  maintain.  Enormous  quantities  of 
money  are  carried  in  this  country  by  laborers,  particularly 
foreign  laborers.  "The  Chief  of  the  Department  of  Mines 
of  a  Western  State  points  out  that  when  an  Italian,  Hun- 
garian, Slav  or  Pole  is  injured,  a  large  sum  of  money,  rang- 
ing from  fifty  dollars  to  five  hundred  or  one  thousand,  is 
almost  always  to  be  found  on  his  person.  A  prominent 
Italian  banker  says  that  the  average  Italian  workman 
saves  two  hundred  dollars  a  year,  and  that  there  are  enough 
Italian  workmen  in  this  country,  without  considering  other 
nationalities,  to  account  for  three  hundred  million  dollars 
of  hoarded  money."  '  I  do  not  wish  to  attach  too  great 
importance  to  these  figures,  taken  from  a  popular  article 
in  a  popular  periodical.     It  is  proper  to  point  out,  too, 

'  I.0C.  cil.,  pp.  50-5 1 . 
^  Loc.  at.,  p.  280. 

'  A.  W.  Atwood,  "Hoarded  Gold,"  Salurday  Evening  Post,  Dec.  12,  1914, 
p.  26. 


174 


THE   VALUE   OF  MONEY 


• « 


m\ 


l 


that  these  figures  relate  to  hoarded  money,  rather  than  to 
M,  the  money  in  circulation.  But  in  part  these  figures 
represent,  not  money  absolutely  out  of  circulation,  but 
rather,  money  with  a  sluggish  circulation.  And  they  are 
figures  of  the  money  in  the  hands  of  poor  and  ignorant 
elements  of  the  population.  Outside  that  portion  of  the 
population— larger  in  this  country  than  in  any  other  by 
far  '—which  keeps  checking  accounts,  are  a  large  body  of 
people,  the  masses  of  the  big  cities,  the  bulk  of  rural  la- 
borers, especially  negroes,  the  majority  of  tenant  farmers, 
a  large  proportion  of  small  farm  owners,  especially  nominal 
owners,  and  not  a  few  small  merchants  in  the  largest  cities, 
who  have  no  checking  accounts  at  all.  A  very  high  per- 
centage of  their  buying  and  selling  is  by  means  of  money. 
Kinley's  results  ^  show  that  70%  of  the  wages  in  the 
United  States  are  paid  in  cash,  and,  of  course,  the  laborers 
who  receive  cash  pay  cash  for  what  they  buy.  (Not 
necessarily  at  the  time  they  buy!)  Money  for  pay-rolls 
is  one  of  the  serious  problems  in  times  of  financial  panics.' 
To  fix  the  proportion  between  money  in  the  hands  of  bank 
depositors  and  non-depositors  is  not  necessary  for  my  pur- 
poses—a priori  I  should  anticipate  that  there  is  no  fixed 
proportion.  But  it  is  enough  to  pomt  out  that  money  in 
the  hands  of  depositors  is  not  the  whole  of  Fisher's  M.  Of 
what  relevance  is  it,  then,  to  pomt  out,  even  if  it  were  true, 
that  an  unascertainable  portion  of  M  tends  to  keep  a  definite 
ratio  to  M',  when  the  thij\g  to  be  proved  Is  that  the  whole 
of  M  tends  to  keep  a  definite  ratio  to  M'?  Fisher's  argu- 
ment is  a  clear  non-sequitur.    If  it  proves  anything,  it 

'  C/.  Kinley,  D.,  TIic  Use  of  Credit  InstrumciUs,  Senate  Document  399, 
1910,  pp.  192-194. 

'^Ibid.,  pp.  102-103.  In  the  same  volume,  on  p.  200,  the  figures  are 
Ki\en  incorrectly,  as  70%  checks  and  30%  cash.  C.  A.  Phillips,  Readings 
in  M&ney  and  Bimkins,  '9'6,  p.  151,  repeats  this  erroneous  statement. 

'C/.  Sprague,  Crises  under  the  Naticmal  Banking  System,  Nat.  Monetary 
Commission  Report,  pp.  71-75;  200,  202. 


THE  VOLUME  OF  MONEY  AND  CREDIT 


175 


proves  that  a  sum  of  money,*  not  part  of  M,  and  another 
sum  of  money,  an  unknown  fraction  of  M,  each  inde- 
pendently, for  reasons  peculiar  to  each  sum,  tends  to  keep 
a  constant  ratio  to  M'.  This  gives  us  I'embarras  des 
richesses  from  the  standpoint  of  a  theory  of  causation! 
Two  independent  factors,  bank-reserves  and  money  in  the 
hands  of  depositors,  each  tending  to  hold  bank-deposits 
in  a  fixed  ratio,  and  yet  each  moved  by  independent  causes! 
By  what  happy  coincidence  will  these  two  tendencies  work 
together?  Or  what  is  the  causal  relation  between  them? 
And  if,  for  some  yet  to  be  discovered  reason.  Professor 
Fisher  should  prove  to  be  right,  and  there  should  be  a 
fixed  ratio  between  M  as  a  whole  and  bank-deposits,  would 
it  not  indeed  be  a  miracle  if  all  three  "fixed  ratios"  kept 
together?  Bank-deposits,  indissolubly  wedded  to  three 
independent  variables^  (independent,  at  least,  so  far  as 

'  Cf.  also  p.  280  of  Fisher's  Purchasing  Power  of  Money. 

'  Kemmerer  {Money  and  Credit  Inslrnmeuts,  p.  80)  maintains  that,  "under 
perfectly  static  conditions,"  money  in  circulation  and  money  in  bank  re- 
serves will  keep  a  fixed  relation  to  one  another.  He  offers  no  argument  to 
support  this  vjew.  Of  course,  "under  perfectly  static  conditions,"  every- 
thing keeps  in  fixed  relation  to  everything  else.  The  volume  of  credit  will 
keep  a  fixed  relation  to  the  number  of  lalxirers  and  to  the  supply  of  clocks. 
But  this  would  hardly  establish  causal  connections!  Fisher  multiplies  " fixed 
relations"  of  various  kinds,  without,  so  far  as  very  diligent  search  can  tell, 
offering  any  argument  to  supiwrt  them.  Thus,  we  have  on  p.  105  the  state- 
ment, "We  have  seen  that  normally  the  quantities  of  other  currency  are 
proportional  to  the  quantity  of  primary  money,  which  we  are  supposing 
to  be  gold."  Where  this  thesis  has  been  demonstrated,  he  does  not  indicate. 
In  view  of  the  fact  that  gold  has  been  the  one  really  flexible  element  in  our 
money  supply,  the  thesis  is  hardly  credible.  On  pp.  146-147.  facing  this  dif- 
ficulty, Fisher  says:  "Since,  however,  almost  all  the  money  can  be  used  as 
bank  reserves,  even  national  bank-notes  being  so  used  by  state  banks  and 
trust  companies,  the  proportionate  relations  between  money  in  circulation, 
money  in  reserves,  and  bank-deposits  will  hold  approximately  true  as  the 
normal  condition  of  affairs.  The  legal  requirements  as  to  reserves  strengthen 
the  tendency."  Here  is  a  very  substantial  growth  in  the  doctrine,  with  only 
one  new  argument,  namely,  that  concerning  legal  reserve  requirements^ 
which  gives  minimal  ratios,  not  fixed  ratios.  In  what  way  the  fact  that 
most  kinds  of  money  can  serve  as  legal  reserves  gives  reason  for  the  doc- 
trine of  fixed  proportions  is  not  made  clear.    For  Professor  Fisher,  however, 


176 


Tin:   VALUE   OF   MONF.Y 


if' 


anything  Professor  Fisher  has  saitl  would  show,  and  inde- 
pendent in  large  degree,  certainly,  so  far  as  any  reason  the 
present  writer  can  discover),  must  find  their  treble  life 
extremely  perplexing.  May  it  not  be  that  Professor 
Fisher  has  pointed  the  way  to  the  real  fact,  namely,  that 
bank-deposits  are  subjected  to  a  multituile  of  influences, 
no  one  of  which  is  dominant,  which  prevent  any  fixed  ratio 
between  bank-deposits  and  any  other  one  thing?  At  a 
late"-  point,  I  shall  maintain  that  this  is,  indeed,  the  case. 

Be  it  noted  further,  however,  that  even  if  we  grant  a 
fixed  ratio,  on  the  basis  of  Fisher's  argument,  between  M 
and  M',  Fisher  has  offered  no  jot  of  proof  that  the  causa- 
tion runs  from  M  to  M'.  He  simply  assumes  that  point 
outright.  "Any  change  in  M,  the  quantity  of  money  in 
circulation,  requiring  as  it  normally  Joes  a  proportional 
change  in  M',  the  volume  of  deposits  subject  to  check." 
(Ibid.,  p.  52,  Italics  mine.)  For  this,  no  argument  at  all 
is  ofTered.  A  fixed  ratio,  so  far  as  causation  is  concerned, 
might  mean  any  one  of  three  things:  (a)  that  M  controls 
M';  (b)  that  M'  controls  M;  (c)  that  a  common  cause  con- 
trols both.  Fisher  does  not  at  all  consider  these  alternative 
possibilities.  I  shall  myself  avoid  a  sweeping  statement 
as  to  the  causal  relations  among  the  factors  in  the  equation, 
because  I  do  not  think  that  any  of  the  factors  is  homogenous 
enough,  as  an  aggregate,  to  be  either  cause  or  effect  of  any- 
thing.   But  if  a  generalization  concerning  these  magni- 

it  seems  quite  enough,  for  on  p.  162,  in  the  heart  of  his  causal  theory,  he 
!)oldly  announces:  "There  must  be  some  relation  between  the  amount  of 
money  in  circulation,  the  amoimt  of  reserses,  and  the  amount  of  deposits, 
.'iormally  li'c  have  strii  that  the  three  remain  in  given  ratios  to  each  other." 
(Italics  mine.)  It  is  doubtless  somewhat  dangerous  to  make  a  confident 
negative  statement  concerning  a  btK)k  which  has  no  index.  Hut  careful 
reading  of  all  that  has  preceded  this  statement  reveals  no  references  to  this 
topic  except  those  quoted  above.  "We  have  seen"  is  not  a  legitimate  prem- 
ise when  so  imixjrtant  an  issue  is  involved.  Jn  our  discussion  of  reserves 
in  the  section  on  credit,  as  well  as  in  the  discussion  of  the  volume  of  trade, 
it  will  a|)|)ear  that  no  "  normal "  or  "  static  "  relations  of  this  kind  are  {K)ssible. 


THE  VOLUME  OF  MONEY  AND  CREDIT 


177 


tudes  were  required,  I  should  be  disposed  to  assert  that  the 
third  alternative  is  the  most  defensible,  and  that  to  the 
extent  that  M  and  M'  vary  together  it  is  under  the  in- 
fluence of  L  common  cause,  namely,  PT!  That  is  to  say, 
that  the  volume  of  bank-deposits  and  the  volume  of  money 
tend  to  increase  or  decrease  in  a  given  market — and  Fisher's 
theory  is  a  theory  of  the  market  even  of  a  single  city  '  - 
because  of  increases  or  decreases  in  PT  (considered  as  a 
unitary  cause  rather  than  as  two  separate  factors)  in  that 
market.  But  I  shall  not  put  my  proposition  in  quite  that 
form,  as  I  find  the  factors  in  the  equation  of  exchange  too 
indefinite  for  satisfactory  causal  theory. 

So  much  for  the  validity  of  Fisher's  argument,  assuming 
the  facts  to  be  as  he  states  them.  Are  the  statements 
correct?  Do  banks  tend  to  keep  fixed  ratios  between  de- 
posits and  reserves?  Do  individuals,  firms,  and  corpora- 
tions tend  to  keep  fixed  ratios  between  their  cash  on 
hand  and  their  balances  in  bank?  Regarding  this  last 
tendency.  Professor  Fisher  says  in  a  footnote  on  p.  50, 
"This  fact  is  apparently  overlooked  by  Laughlin."  I 
think  it  has  been  generally  overlooked.  I  have  found  no 
one  who  has  discovered  it  except  Professor  Fisher.  Cer- 
tainly no  depositor  whom  I  have  consulted  can  find  it  in 
his  own  practice — and  I  have  put  the  question  to  "indi- 
viduals, firms,  and  corporations."  The  further  statement 
which  Professor  Fisher  adduces  in  its  support  does  not 
prove  it,  namely,  that  cash  is  used  for  small  payments,  and 
checks  for  large  payments.^  It  would  be  necessary  to  go 
further  and  prove  that  large  and  small  payments  bear  a 

'  "The  price-level  outside  of  Xew  York  City,  for  instance,  affects  the 
price-level  in  New  York  City  only  via  changes  in  the  money  in  New  York 
City.  Within  New  York  City  it  is  the  money  which  influences  the  price- 
level,  and  not  the  price-level  which  influences  the  money.  The  price-level 
is  effect  and  not  cause."    {Loc.  cit.,  p.  172.) 

2  Loc.  cit.,  p.  50. 


11  ii  ■ 


ffii 


178 


THK    VALUK    OF   MONEY 


constant  ratio  to  one  another,  and  further,  that  velocities 
of  money  and  of  bank-deposits  employed  in  these  ways 
bear  a  constant  relation.  If  Fisher  has  any  concrete  data, 
of  a  statistical  nature,  to  support  the  doctrine  of  a  constant 
ratio  between  bank-balance  and  cash  on  hand  in  the  case 
of  individual  depositors,  he  has  failed  to  put  them  into  his 
book.  Nor  is  there  any  statistical  evidence  offered  in  the 
case  of  banks.  It  should  be  noted  here  that  finding  a  gen- 
eral average  for  a  whole  country  or  community  would  not 
prove  Fisher's  point.  General  averages  give  no  concrete 
causal  relations.  Fisher's  argument,  moreover,  starts 
with  individual  banks  and  individual  deposit-accounts 
(pp.  46  and  50)  and  generalizes  the  individual  practice  into 
a  community  practice.  He  would  have  to  ofTer  data  as  to 
individual  cases. 

While  general  averages  could  not  prove  the  contention  of 
a  constant  ratio  between  reserves  and  deposits  for  individual 
banks,  general  averages  can  disprove  the  contention.  A 
constant  general  average  would  be  consistent  with  wide 
variation  in  individual  practices,  on  the  principle  of  the 
"inertia  of  large  numbers."  But  if  the  general  average  is 
inconstant,  it  is  impossible  that  the  individual  factors  mak- 
ing it  up  should  be  constant.  This  disproof  is  readily  at 
hand,  both  for  thv.  ratio  of  deposits  to  reserves  in  the 
United  States,  and  for  the  ratio  of  demand  obligations  to 
reserves  among  European  banks  (most  of  which  do  not 
make  large  use  of  the  check  and  deposit  system). 

For  the  United  States,  from  1890  to  191 1,  taking  yearly 
averages,  we  have  a  variation  in  the  ratio  of  reserves  to 
deposits  of  o\er  73%  of  the  minimum  ratio.  The  ratio 
was  2(f/[)  in  1894,  and  15%  '"  1906.  "The  juxtaposition 
of  these  extreme  variations  shows  how  inaccurate  is  the 
assumption  that  the  deposit  currency  may  be  treated 
as  a  substantially  constant  multiple  of  the  quantity  of 


^^ya^t:--  .™=rr 


THE   VOLUME  OF  MONEY  AND  CREDIT 


179 


money  in  banks."  *  For  New  York  City,  the  annual  average 
percentage  of  reserves  of  Clearing  House  banks  to  net  de- 
posits varies  from  24.89%  in  1907  to  37.59%  in  1894.' 
The  extreme  variations '  in  weekly  averages  are  (for  the 
sixteen  years,  1885-1900)  20.6%  in  August,  1893  and 
45.2%  in  February,  1894.  These  figures  are  extreme, 
since  the  number  of  occurrences  is  small  for  them,  but 
there  are  numerous  occurrences  of  deviations  from  the  mean 
as  wide  apart  as  24%  and  42%.*  The  yearly  fluctuation 
in  all  these  ratios  is  very  great. 

The  ratio  of  money  held  by  the  banks  and  money  held  by 
the  people  also  shows  wide  variation,  and  considerable 
yearly  fluctuation.  There  is  a  further  complication,  for 
the  United  States,  of  varying  proportions  of  the  total 
monetary  stock  held  by  the  Federal  Treasury.  As  between 
the  banks  and  the  public,  the  banks  held  about  a  third  in 
1893  (average  for  the  year),  and  nearly  half  in  1911.^ 
Whatever  may  be  the  relations  between  money  in  the  hands 
of  the  people,  money  in  banks,  and  volume  of  deposits,  in 
"the  static  state,"  there  is  no  statistical  evidence  whatever 
to  justify  the  notion  of  fixed  relations  among  them  in  real 
life.'  We  shall  later  show  that  there  can  be  no  static  laws 
whatever  governing  the  relations  of  credit  and  reserves.^ 

For  European  banks,  the  case  is  equally  clear.    European 

'  W.  C.  Mitchell,  Business  Cycles,  p.  306. 

*  Ibid.,  p.  325. 

*  J.  P.  Norton,  Slatislical  Studies  in  the  Nrui  York  Money  Market,  p.  71, 
and  chart  opposite  p.  72. 

*  Ibid.,  chart  facing  p.  7a. 

*  Cf.  Mitchell,  loc.  cit.,  chart,  p.  298,  and  text,  p.  295.  As  the  ratio  of  re- 
serves to  money  in  circulation  was  greater  in  191 1  than  in  1894,  and  as  the 
ratio  of  deposits  to  reserves  was  also  higher,  we  have  a  still  wider  variation 
in  the  ratio  of  money  in  circulation  to  deposits — M:  M'. 

*  See  the  striking  figures  collected  by  A.  P.  Andrew  for  1907.  Quart.  Jour, 
of  Econ.,  Feb.  1908,  p.  397. 

'  Infra,  our  discussions  of  the  relation.-!  of  volume  of  money  and  credit 
to  volume  of  trade,  and  our  discussion  of  credit  in  the  constructive  part  bf 
the  book.    The  theory  of  money  and  credit  must  be  a  dynamic  theory. 


i8o 


THE  VALUE  OF   MONEY 


ii 


hankers  ilcny  any  intention  oi  keeping  any  <lefinite  reserve 
ratio.  This  apinand  very  tliarl)  in  the  "Interviews" 
«»l)tainefl  for  the  Monetary  Comniission  with  leadinj;  ICuro- 
[K-an  bankers.'  The  Ban(|ue  de  France  increased  its  gold 
reserves,  between  1899  and  1910,  by  75'',^,  but  increased 
its  discounts  and  advances  during  the  same  period  by 
only  s^i--  J.  M.  Keynes  ''  iwints  out  that  the  reserves 
of  the  great  banks  of  the  world,  and  of  Treasuries 
which  act  as  central  banks,  have  absorbed  an  enormous 
part  of  the  gold  produced  in  the  lifteen  years  before  the 
War,  increasing  their  holdings  from  about  five  hundred 
million  pounds  sterling  in  1900  to  one  billion  pounds 
sterling  at  the  outbreak  of  the  War.  "The  object  of 
these  accumulations  has  been  only  dimly  conceived  by  the 
owners  of  them.  They  have  been  piled  up  partly  as  the 
result  of  blind  fashion,  partly  as  the  almost  automatic  con- 
sequence, in  an  era  of  abundant  gold  supply,  of  the  partic- 
ular currency  arrangements  which  it  has  been  orthodox  to 
introduce.  .  .  .  The  ratios  of  gold  to  liabilities  vary  very 
extremely  from  one  country  to  another,  without  always 
being  explicable  by  reference  to  the  varying  circumstances 
of  those  countries.  .  .  .  The  contingencies,  against  which 
a  gold  reserve  is  held,  are  necessarily  so  vague  that  the 
problem  of  assessing  the  proper  ratio  must  be,  within 
wide  limits,  indeterminate.  It  is  natural,  therefore,  that 
bankers,  who  must  act  one  way  or  the  other,  should  often 
fall  back  on  mere  usage  or  accept  that  amount  of  gold  as 
sufficient  which,  if  they  are  chiefly  passive,  llie  tides  of  gold 
bring  them.  [Italics  mine.]  At  any  rate,  the  management 
of  gold  reserves  is  not  yet  a  science  in  most  countries. 
There  is  no  ideal  virtue  in  the  present  level  of  these  re- 

'  Senate  Document.  No.  405.  igio.    For  the  Bank  of  Kngland,  see  p.  25; 
f(ir  tlic  Crtniit  Lyonnais,  pp.  -'-'4   ^^'K  for  the  l)('iits<-hc  BiinU,  pp.  .^74-37.^ 
''Statist,  igi2,  p.  577- 
'  "The  I'i(is|)ects  of  Money,"  Hritish  Eioiimiiir  Journal,  Dec.  1^14. 


THE   VOLUME  OF   MONEY   AND  CREDIT 


l8l 


serves.    Countries  have  got  on  in  the  past  with  much  less, 
and  un<lcr  force  of  circumstances  could  do  so  agait.." 

It  will  lie  noticed  that  Keynes,  in  the  passage  cited,  is 
speaking  of  ^old  reser\'es,  while  Fisher's  contention  relates 
to  all  kinds  of  money  available  for  reserves,  which  in  this 
country  would  include  gold,  silver  dollars,  greenbacks,  and, 
for  many  Stale  banks,  the  notes  of  national  banks.  He  is 
also  talking  of  the  relation  of  reserves  to  demand  liabilities, 
which  for  most  great  European  banks  are  primarily  notes, 
rather  than  of  reserves  to  deposits.  But  as  an  exposition 
of  the  theory  of  the  ratio  of  reserves  to  deposits  (the  chief 
liability  of  American  banks),  it  is  applicable  to  American 
conditions,  and  as  a  statement  of  the  facts,  it  of  course 
gives  a  basis  for  testing  Fisher's  doctrine  generally.  I  do 
not  think  that  Fisher's  fi.xed  r^tio,  as  between  reserves  and 
deposits,  or  even  the  ratio  w/  Ii  more  moderate  quantity 
theorists  might  seek  to  find  between  gold  and  demand  liabil- 
ities, will  find  any  justilication  in  the  facts  of  banking  his- 
tory.' 

A  factor  which  has  developed  on  a  grand  scale  in  recent 
years  has  tended  still  further  to  weaken  any  tendency  that 
may  be  supposed  to  exist  toward  a  fixed  ratio  between 
money-reserves  and  demand-liabilities.  I  refer  to  the 
gold  exchange-standard,  in  India,  the  Philippines,  and 
elsewhere,  and  to  the  practice  of  the  great  banks  of  the 
continental  countries  of  Europe,  particularly  the  Bank  of 
Austria-Hungary,  of  holding  foreign  gold  bills,  rather  than 
gold  exclusively,  as  reserve  to  cover  note  issue.  In  the 
case  of  the  Austro-Hungarian  Bank,  which  has  carried  this 
practice  to  the  extreme,  all  possibility  of  a  fixed  ratio  be- 
tween gold  reserves  and  demand-liabilities  has  vanished. 
The  ratio  is  highly  flexible.  When  bills  are  cheap,  i.  e., 
when  the  exchange  is  "in  favor"  of  Austria-Hungary,  the 

'  Cf.  Ashley,  \V.  J.,  Gold  and  Prices,  N.  Y.,  191 2.    p.  21  el  seq. 


I'J 


ill 


182 


THE  VALUE   OF  MONF.Y 


If 


<       W 


Bank  buys  bills  with  gold;  when  bills  are  high,  when  the 
exchanges  have  turned  "against"  Austria-Hungary,  the 
Bank  sells  bills  for  gold.  Commonly,  the  holder  of  a  note 
of  the  Austro-Hungarian  Bank  does  not  ask  for  it  to  be 
redeemed  in  gold,  but  in  foreign  exchange.  The  reason 
for  this  practice  on  the  part  of  the  Bank  is  primarily  econ- 
omy. A  large  holding  of  gold  would  represent  idle  capital 
— a  heavy  burden  for  the  Bank  of  a  debt-ridden  and  poorly 
developed  country.  Foreign  bills,  however,  serve  equally 
well  for  maintaining  tiie  value  of  the  bank-notes,  and  at 
the  same  time  bear  interest.'  A  similar  practice  has  been 
employed  by  the  Reichsbank,  by  the  National  Bank  of 
Belgium, 2  by  virtually  all  the  debtor  countries  of  Europe, 
and  the  great  trading  countries  of  Asia. 

Confidence  in  these  conclusions  is  much  increased  by  a 
study  of  the  views  of  Professor  Taussig.'  Professor  Taus- 
sig is,  in  his  initial  formulations  of  his  doctrine,  a  quantity 
theorist.  In  a  situation  where  only  money  is  used,  credit 
being  excluded,  in  effecting  exchanges,  he  would  hold  that 
the  quantity  theory  correctly  accounts  for  prices.  He  is 
fond  of  the  old  formulation,  as  a  first  approximation,  even 
in  dealing  with  the  complex  facts  of  modern  banking.  But 
h*.  does  not  dodge  the  complex  facts,  and  his  theory  be- 
comes, substantially,  first,  a  general  formula,  and  second, 
an  elaborate  body  of  qualifications  and  exceptions,  the 
latter  making  up  the  major  part  of  the  theory.  His  doc- 
trine regarding  the  relation  of  money  and  credit  is  as  fol- 
lows: there  is,  in  the  long  run,  a  real  limitation  on  elastic 
credit  instruments  in  the  quantity  of  specie.     (This  is  very 

'  Cf.  von  Mises,  "The  Foreign  Exchange  Policy  of  the  Austro-Hungarian 
Bank,"  liritish  Ecoit.  Jour.,  1909,  vol.  19.  Cf.  Keynes,  Indian  Currency 
and  Finance. 

'  Conant,  Principles  of  Money  and  Banking,  vol.  II,  p.  50.  In  1899,  the 
reserve  of  the  Bank  of  Belgium  consisted  of  107  millions  (francs)  In  specie, 
and  108  millions  in  foreign  bills. 

'  Principles  of  Economics,  vol.  I,  pp.  432  ct  scq. 


THE   VOLUME   OF  MONEY  AND  CREDIT 


183 


different  from  the  assertion  that  there  is  a  fixed  ratio  be- 
tween deposits  and  money  in  circulation,  including  paper, 
bank-notes,  etc.,  in  money.     The  present  writer  has  no 
quarrrl  with  the  doctrine  that  the  gold  supply  of  the  world 
imposes  outside  limitations  on  the  possible  expansion  of 
credit.)     The   limitation,   Taussig   holds,    comes   in    two 
ways:  (i),  in  the  connection  between  prices  in  any  one  coun- 
try, and  prices  in  the  worid  at  large;  (2),  in  various  links  of 
connection  between  the  volume  of  deposits  (and  of  notes 
elastic  like  deposits)  and  the  quantity  of  specie.    I  shall 
consider  at  a  later  point  the  relation  between  prices  in 
different    countries.*    I    shall    there   maintain    that    the 
quantity  theory,  which  explains  gold  movements  on  the 
basis  of  price-la'cls  in  different  countries,  is  inadequate; 
that  not  price-levels,  but  particular  prices,  of  goods  most 
available  for  international  trade,  are  of  primary  impor- 
tance, and  that  of  these  particular  prices,  one,  namely  the 
"price  of  money,"  or  the  short  time  money-rate,  is  most 
significant  of  all.    For  the  present,  I  wish  to  analyze  the 
linkages  which  Taussig  finds  between  elastic  credit  instru- 
ments and  specie,  and  to  see  how  far  they  would  go,  not 
in  proving  Taussig's  point  (with  which  I  have  little  quarrel) 
but  in  proving  Fisher's  contentions.    The  points  involved 
are:  (a)  Direct  necessity  constrains  the  bankers  to  keep  some 
cash  on  hand.-    This  fixes  a  minimum  limit  (Taussig's 
contention),  but  does  not  at  all  suggest  a  "normal  ratio" 
(Fisher's   contention),     (b)    Binding    custom,    as    to    the 
proper  amount  of  reserve  that  banks  should  carry,  par- 
ticulariy  important  in  connection  with  the  Bank  of  Eng- 
land, but  also  in  evidence  in  the  Banque  de  France  and  the 
Reichsbank.    Here  again,  however,  minimal,  rather  than 

'  In  tlie  chapter  on  "Quantity  Theory  and  International  Gold  Move- 
ments." infra. 

•The  joint  Stock  Banks  in  Kngland  keep  "till  money"  in  cash,  even 
though  their  "reserves'"  are  chiefly  de|x)sits  at  the  Bank  of  England. 


ill 


;if 


Hi 


184 


THE   VALUE   OF   MONEY 


fixed,  ratios  are  suggested.    Limitations  on  the  expansion 
of  credit  these  customs  may  impose,  but  they  by  no  mean-; 
determine  a  normal,  or  average  amount  of  credit  exi  ansion 
—in  England  least  of  all,  since  there  is  so  large  a  flexible 
element  in  the  deposits  of  the  Joint  Stock  Banks,  whose 
reserves  are  largely  secret.     The  statement  supra  quoted 
from  Ke>Ties,  together  with  the  testimony  of  European 
bankers,  may  be  considered  in  connection  with  this  point, 
also,  as  to  the  factors  determining  the  reserve  policies  of 
the  great  European  banks.    The  extent  to  which  custom 
really  binds  is  doubtful,  (c)  Direct  regulation  hy  law,  pe- 
culiar to  the  United  States.    Here  again,  a  minimum, 
rather  than  a  fixed  ratio,  is  indicated.     Some  limitation  on 
credit  expansion  by  the  banks  is  caused  by  this  at  times, 
but  Fisher's  argument  would  require  vastly  more,     (d) 
The  interaction  in  the  use  of  deposits,  notes,  a}id  otfter  con- 
stituents in  the  circulating  medium.     The  point  involved 
here  is  that  different  kinds  of  business  call  for  different 
kind  of  media.    Small  retail  business  is  not  done  with 
hundred  dollar  bills,  nor  are  stocks  and  bonds  bought  with 
pennies.    Limiting  the  size  of  bank-notes  to  five  pounds  in 
England  compels  the  use  of  a  large  amount  of  gold  for 
sm.aller  transactions,  and  keeps  a  larger  amount  of  gold  in 
use  than  would  otherwise  be  the  case.    Expanding  business 
draws  cash  from  the  banks  for  circulation,  trenching  on  re- 
serves.    That  Professor  Taussig  has  a  point  here  is  not  to 
be  doubted,  but  how  closely  it  limits  the  expansion  of 
credit  will  depend  on  the  degree  to  which  different  kinds  of 
media  of  exchange  really  arc  thus  specialized.     In  a  country 
like  the  United  States,  where  checks  may  be  used  for  vir- 
tually any  transaction  of  over  a  dollar,  and  where  small 
change  for  less  than  a  dollar  will  be  increased  by  the  Gov- 
ernment to  meet  the  demands  of  trade,  the  point  would 
not  seem  to  involve  a  practically  serious  limitation. 


THE  VOLUME  OF  MONEY  AND  CREDIT 


185 


Finally,  Professor  Taussig  recognizes  a  coefficient  with 
the  quantity  of  specie  in  the  temper  of  the  business  com- 
munity. Whether  or  not  deposits  are  to  expand,  depends 
not  only  on  reserves,  but  also  on  the  attitude  of  borrowers. 

Taussig  concludes:  "Thus  there  is  only  a  rough  and  un- 
certain correspondence  of  bank  expansion  with  bank  re- 
serves; much  play  for  ups  and  downs  which  have  no  close 
relation  to  the  amount  of  cash  in  bank  vaults,  and  still  less 
direct  relation  to  the  amount  of  money  afloat  in  tlie  community 
at  large.  Where  bank  media,  whether  in  the  form  of  de- 
posits or  notes,  are  an  important  part  of  total  purchasing 
power,  the  connection  between  general  prices  and  quan- 
tity of  'rr    ney'  is  irregular  and  uncertain."  (Italics  mine.) 

This  conclusion  vvould  be  of  little  service  in  supporting 
Fisher's  rigorous  contentions!  Our  constructive  theory  con- 
cerning the  relations  of  reserves  and  deposits,  or  reserves  and 
demand  liabilities,  must  wait  for  later  discussion  in  the 
chapter  on  "Bank  Assets  and  Bank  Reserves"  in  Part  III. 
It  will  there  be  maintained  that  there  are  no  "normal"  or 
"static"  laws  governing  the  percentage  of  reserves  to  de- 
mand liabilities,  or  to  deposits,  that  the  reserve  function  of 
money  is  a  dynamic  function,  and  that  its  whole  explanation 
must  be  found  in  dynamic  considerations.  For  the  present, 
I  am  content  to  have  analyzed  two  widely  divergent  views, 
one  the  extreme  view  of  Professor  Fisher,  representing  the 
quantity  theory  in  its  utmost  rigor,  and  the  other,  the 
view  of  Professor  Taussig,  who  virtually  surrenders  the 
quantity  theory  in  complex  modern  conditions. 

In  between  these  two  writers,  verging  more  toward 
Fisher  than  toward  Taussig,  will  be  found,  with  great  in- 
dividual variation,  the  rest  of  the  quantity  theorists.  The 
quantity  theory,  as  an  instrument  of  prediction,  becomes 
important  only  to  the  extent  that  Fisher's  view  is  main- 
tained. 


I 


'I 


'   I 


II 


>!,  !i 


CHAPTER  X 
"NORMAL"   VS.   "TRANSITIONAL"   TENDENCIES 

The  Quantity  Theory,  as  a  causal  theory,  is,  then,  little 
altered  by  the  passage  from  a  hypothetical,  creditiess  econ- 
omy to  the  actual  world,  where  a  vast  deal  of  crecit  is 
used,— particularly  in  Professor  Fisher's  hands.  Of  the 
difTerent  kinds  of  credit,  only  deposits  subject  to  check  are 
recognized  as  directly  influencing  prices,  and  deposits  sub- 
ject to  check  are  controlled  by  the  volume  of  money.  The 
causal  theory  »  remains,  then,  as  follows:  if  M  be  increased, 
it  will  increase  M'  proportionately;  it  will  not  change  the 
V's;  it  cannot  increase  T;  to  keep  the  equation  straight, 
therefore,  P  must  rise  in  proportion  to  the  rise  in  M.  A 
decrease  of  M,  reducing  M'  proportionately,  leaving  V's 
and  T  unchanged,  must  proportionately  reduce  P.  P  is 
passive.  A  change  in  P  cannot  sustain  itself,  unless  it  be 
due  to  a  prior  change  in  T,  the  V's,  M  or  M'. 

This  theory  is  set  forth  with  the  qualification  that  these 
effects  are  the  'normal"  effects  of  the  changes  in  question. 
The  proportion  between  quantity  of  money  and  price-level 
is  not  strictly  maintained  during  "transition  periods."  I 
now  approach  the  most  difBcult  question  which  I  shall  have 
to  answer  as  to  the  meaning  of  Fisher's  terms.  The  same 
problem  arises  for  all  quantity  theorists.  Precisely  what 
is  the  distinction  between  "transition  periods"  and  "nor- 
mal periods"?  What  limitations  and  qualifications  does 
he  admit  to  the  rigorous  statement  of  his  theory  so  far 

'  Fislur,  loc.  cil.  passim.    Vide  especially  ch.  8. 
l86 


'^f 


"normal"  vs.  "transitional"  tendencies 


187 


given?    I  may  first  express  the  opinion  that  the  line  shifts 
greatly  in  his  own  mind,  or  at  least  shifts  greatly  in  the  ex- 
position.   I  do  not  find  an  explicit  statement  in  which  defi- 
nitions are  given.    The  matter  is  chiefly  discussed  by 
Fisher  in  ch.  4,'  which  is  called  "Disturbance  of  Equation 
and   of  Purchasing   Power   during   Transition   Periods." 
There  we  find,  as  I  have  stated,  no  definitions,  but  the  initial 
statements  would  suggest  the  folknving:  a  transition  period 
is  the  period  following  a  change  in  any  one  of  the  factors 
in  the  equation  during  which  a  readjustment  among  all  the 
others  is  taking  place;  the  normal  period  is  the  period  pre- 
ceding such  a  change,  or  following  the  transition  after  such 
a  change,  and  is  characterized  by  the  fact  that  all  the  fac- 
tors are  at  rest,  m  stable  equilibrium.    Equilibria  during 
transition  periods  are  unstable.    During  the  transition, 
the  relations  among  the  factors  vary:  M  and  M'  need  not 
keep  their  fixed  ratio;  P  need  not  be  wholly  passive;  M  and 
P  need  not  keep  the  same  proportion.    But  imtil  M  and 
M'  get  back  into  the  normal  ratio,  until  P  becomes  propor- 
tional to  M  (in  the  proportion  prior  to  the  initial  disturb- 
ance), there  is  no  rest;  the  equilibrium  is  unstable.    How 
long  is  a  transition  period?    How  realistic  is  the  notion  of  a 
transition  period?    Is  the  transition  period  a  theoretical 
device,  to  aid  in  isolating  causes,  or  is  it  supposed  to  be  a 
real  period  in  time?    Is  the  normal  period  a  real  period  in 
time,  or  is  it  merely  a  theoretical  hypothesis?    It  is  not 
easy  to  answer  these  questions.    Thus  (p.  72)  the  seasonal 
fluctuations  are  declared  to  be  "normal  and  expected," 
and,  at  the  same  time,  one  gets  the  impression  that  Fisher 
considers  them  illustrations  of  his  "transitions,"  in  which 
the  normal  theory  does  not  strictly  hold  (pp.  72,  169). 
What  is  described  chiefly  in  the  chapter  on  transition 
periods  is  the  business  cycle  —a  theory  of  the  business 

1  Purcliasing  Power  of  Money. 


1 88 


THK   VALUE   OF  MONEY 


n 


1^ 
111 


cycle,  based  primarily  on  the  notion  that  the  failure  of 
interest  to  rise  as  fast  as  prices  rise  causes  the  "boom," 
and  that  the  draining  of  bank  reserves  precipitates  the 
crisis,  I  shall  not  discuss  this  theory,  as  a  theory  of  busi- 
ness cycles,  further  than  to  say  that  Wesley  Mitchell's 
study  would  indicate  that  the  interest  rate  is  a  minor 
factor,  and  that,  while  as  a  theoretical  possibility,  the 
drains  on  bank  reserves  may  check  prosperity  if  something 
else  doesn't  do  it  first,  practically  something  else  always 
does  come  in  ahead,  so  far  as  his  studies  have  gone.'  My 
interest  here  is  primarily  in  seeing  the  limitations  Fisher  im- 
poses on  his  theory,  and  the  qualifications  he  admits.  If 
the  business  cycle  is  the  tj-pical  transition  period,  during 
which  his  normal  theory  doesn't  hold,  when  does  the 
normal  theory  hold?  When  are  the  "normal  periods"? 
There  is  no  concrete  period  during  which  prices  are  neither 
rising  nor  falling,  during  which  no  important  changes  are 
taking  place  among  the  factors.-  At  times,  Fisher  seems 
to  indicate  that  the  normal  period  is  imaginary  (pp.  56, 
159).  Is,  then,  the  contrast  between  a  realistic  "transition 
period"  and  a  h}pothetical  "normal  period"  or  are  both 
hypothetical?  Is  the  equation  of  exchange,  too,  a  mere 
hypothesis?  It  should  be,  if  it  is  to  set  forth  a  merely  hy- 
pothetical theory.  But  no,  Fisher  insists  on  putting  con- 
crete data  into  it.  and,  indeed,  gives  an  elaborate  statistical 
"proof"  of  the  equation.  It,  at  least,  is  realistic.  I  con- 
fess that  my  certainty  as  to  Fisher's  meaning  grows  less, 
as  I  study  his  book  with  greater  care.  If  the  typical  transi- 
tion period  be  the  business  cycle,  then  the  normal  period 
could  come  only  once,  say,  in  ten  years — or  whatever 
period,  regular,  or  irregular,  one  chooses  to  assign  to  the 

'  Biiiiitc:,s  Cycles,  pp.  5S0,  S95~50f'- 

'C/.  C.    M.    Walsh,    The  McasurenuiU  of  General  Exiimiige  Value,  -m). 
480-481. 


■jdt^TiE 


NORMAL       VS. 


TR.WSITIONAI,       TKNDENCIES 


l8y 


business  cycle.  The  concrete  price-levels  for  the  greater 
part  of  the  time  are  then  surrendered  to  other  causes.  And 
the  one-year  cycle  described  in  the  equation  of  exchange 
is  quite  irrelevant.  The  equation  of  exchange  should 
cover  the  whole  business  cycle,  to  fit  in  with  the  theory. 
Indeed,  a  realistic  equation  of  exchange  would  then  have 
no  meaning  at  all,  as  the  average  price-level  during  the 
business  cycle,  played  upon  by  a  host  of  causes  other  than 
the  factors  described  in  the  quantity  theory,  would  not  be 
the  same  as  the  average  price-level  which  would  have 
obtained  had  only  the  "normal"  causes  been  in  opera- 
tion.' 

The  distinction  between  "normal"  and  "transition" 
periods  suggests  a  dangerous  fallacy:  namely,  that  during 
one  period  one  sort  of  causation  is  working,  with  the  other 
in  abeyance.  In  fact,  whatever  causes  there  are  are  work- 
ing all  the  time.  The  only  legitimate  thing  is  to  abstract 
from  one  set  of  causes,  and  see  what  the  other  set,  if  left  to 
themselves,  will  bring  about.  But  this  sort  of  abstraction 
has  many  dangers,  one  of  which  is  that  the  causes  ab- 
stracted from  are  frequently  thought  of  as  non-existent. 
The  chemist,  in  his  laboratory,  can  in  actual  physical  fact 
abstract  impurities  from  his  chemicals,  and  see  what  they 
will  do.  He  can  even  perform  experiments  in  what  is 
practically  a  vacuum.  But  the  economist  has  no  right  to 
think  in  vacuo!  All  that  he  has  a  right  to  do  is  to  assume 
the  factors  which  he  does  not  wish  to  study  constant.  And 
even  that  he  must  not  do  if  (i)  changes  in  the  factors  which 
he  wishes  to  study  do  in  fact  lead  to  changes  in  the  factors 
abstracted  from,  or  (2)  if  the  factors  which  he  wishes  to 
study  can  only  change  because  of  prior  or  concomitant 


'  On  pp.  314-J15.  ;intl  elsewhere,  Fisher  indicates  that  all  the  causes  affect- 
ing prices  ojierate  throiig^h  the  factors  in  the  equation  of  exchange.  Cf.  p.  74. 
This  would  require  a  concrete  equation  of  exchange  throughout. 


IQO 


THF:   value   t)F  MONEY 


li 


■I 


changes  in  the  factors  from  which  he  is  abstracting. 
Is  it.  for  example,  legitimate  to  assume  an  increase 
in  M'  apart  from  its  ut^aal  accompaniment,  an  increase 
in  PT? 

The  notion,  too,  that  causation  can  be  seen  in  a  state  of 
stable  equilibrium  should  be  critically  analyzed.  Causa- 
tion is  only  revealed  by  a  course  of  events,  when  mechanical 
causation  is  involved.  The  relation  of  cause  and  efTect 
may  be  a  contemporaneous  relation  in  fact,  and  it  is  pos- 
sible, where  conscious,  psychological  phenomena  are  in- 
volved, to  discern  causal  relations  among  the  elements  in  a 
mental  state  by  direct  introspection.  It  is  the  not  uncom- 
mon practice,  also,  in  the  theory  of  mechanics,  or  in  theo- 
retical economics,  where  the  method  of  investigation  is 
deductive  rather  than  inductive,  to  abstract  from  the  tem- 
poral sequence,  and  to  construe  causal  relations  as  timeless, 
logical  relations.  But  even  here,  the  cause  of  a  change  in 
the  general  situation  precedes  the  change  in  time,  and  it  is 
only  by  abstraction  that  the  time  element  is  left  out.  If 
there  is  no  question  as  to  the  causal  relations,  this  abstrac- 
tion is  legitimate,  but  if  all  that  one  knows  about  the  situa- 
tion be  that  in  a  stable  equilibrium  certain  constant  ratios 
obtain,  then  the  question  as  to  which  term  in  the  ratio  is 
cause  and  which  is  effect  remains  unanswered.  In  Fisher's 
situation,  then,  assuming  that  it  be  true— which  I  shall 
deny — that  the  only  stable  equilibrium  is  that  which  the 
normal  theory  requires,  it  still  remains  true  that  the  causal 
relations  among  the  factors  can  only  be  revealed  by  a  study 
of  the  transitions,  by  seeing  the  temporal  e_4uence  of 
changes  in  the  factors  of  the  equation.  Even  if  it  be 
granted  that  M,  M'  and  P  tend  to  keep  a  constant  relation 
to  one  another,  the  quantity  theory  falls  if.  for  instance, 
it  can  be  shown  that  a  change  may  first  occur  in  P,  spread 
to  M',  and  finally  reach  M  last  of  all,  leading  to  a  new 


"normal"  vs.  "transitional"  tendencies 


191 


normal  equilibrium  which  is  stable.    I  shall  later  show 
cases  of  this  sort.' 

The  abstract  formulation  of  Fisher's  contrast  will  not,  I 
believe,  give  us  an  answer  as  to  the  extent  to  which  he 
thinks  his  quantity  theory  realistic.  I  find  myself  partic- 
ularly in  genuine  uncertainty  as  to  the  point  mentioned 
above:  would  an  actual  equation  of  exchange  for  the  whole 
business  cycle,  made  up  of  the  averages  of  M,  M',  V,  V,  P 
and  T  for  the  whole  period,  exhibit  the  "normal"  relations 
among  these  factors?  Or  would  this  "normal"  relation 
only  emerge  concretely  at  some  moment  of  time  in  the 
course  of  the  cycle  when  the  abnormal  causes  aflecting  the 
price-level  happened  to  ofTset  one  another?  Or  is  it  true 
that  no  actual  figures  which  might  be  found,  either  for  a 
moment  of  time,  or  as  averages  for  any  given  period,  will 
exhibit  the  relations  required,  and  that  only  a  hypothetical 
equation,  based  on  the  figures  for  M,  M',  V,  V,  P  and  T 
that  would  have  been  realized  had  there  been  no  "disturbing" 
causes,  will  show  these  "normal"  relations?  If,  as  Fisher 
at  times  indicates — as  in  his  reference  to  Boyle's  Law 
(p.  296) — he  is  stating  only  an  abstract  tendency,  which 
may  be  neutralized  by  other  tendencies  in  the  situation,  so 
far  as  concrete  results  are  concerned,  then  it  is  this  last 
doctrine  which  we  must  take,  and  the  concrete  equation  of 
exchange  has  little  if  any  relevance.  If,  moreover,  this 
last  interpretation  be  given,  then  the  whole  of  Fisher's 
elaborate  statistical  "proof"  is  pointless.  The  only  sort 
of  statistical  proof  which  would  be  relevant  would  be  of  a 
much  subtler  sort,  not  a  mere  filling  out  of  the  e.^  lation 
of  exchange  by  means  of  annual  figures,  but  an  effort  to 
disentangle  and  measure  the  importance  of  his  tendency,  as 
compared  with  other  tendencies.  But  we  have  the  other 
tendencies  merely  mentioned  in  qualitative  terms,  and  we 

'  Chapter  on  "  Passiveness  of  Prices." 


192 


Tin:   VALUK   OF   MOXF.Y 


[f'lt 


never  find  any  definite  statement,  of  mathematiial  char- 
acter, as  to  how  important  they  are. 

It  seems  pretty  clear,  however,  that  on  the  whole,  despite 
occasional  suggestions  that  his  theory  is  abstract,  Kisher 
means  his  theory  to  he  the  overwhelmingly  important  point 
in  the  explanation  of  actual  price-levels.  He  is  particularly 
insistent  on  the  high  degree  of  the  generality  of  his  con- 
tention that  I'  i>  passive.  Thus:  "So  far  as  I  can  dis- 
cover, cxccpl  to  it  LIMITED  cxlcnt  (luriHg  Iransilion  periods, 
or  during  a  passing  season,  (e.  g.,  I  he  fall)  (capitals  mine, 
italics  Fisher's),  there  is  no  truth  whatever  in  the  idea  that 
the  price-level  is  an  independent  cause  of  changes  in  any 
of  the  other  magnitudes,  M,  M',  V,  \",  or  the  Q's."  '  On 
p.  182  he  enumerates  in  a  series  of  propositions  his  general 
normal  theory,  and  adds,  as  the  first  sentence  of  proposi- 
tion y:  "Some  of  the  foregoing  propositions  arc  subject  to 
SLIGHT  modification  during  transition  periods''  (Italics  and 
capitals  mine.)  And  the  general  drift  of  the  argument, 
particularly  in  chapter  8,  where  the  heart  of  Fisher's 
causal  theory  is  jiresented,  would  indicate  that  the  con- 
cessions he  is  disposed  to  make  are  very  slight,  indeed. 

The  question  as  to  how  long  a  time  is  required,  in  Fisher's 
view,  for  a  transition  to  occur,  and  for  his  normal  tendencies 
to  dominate,  is  nowhere  made  clear.  The  quantity  theory, 
in  the  hands  of  some  writers,  is  a  very  long  run  theory,  for 
others,  it  is  a  short  run  theory.  Thus,  Taussig  would 
make  the  "run"  exceedingly  long.-  Mill  makes  it  a  short 
run  theory.  "It  is  not,  however,  with  ultimate  or  average, 
but  with  immediate  and  temporary  prices,  that  we  are  now 
concerned.  These,  as  we  have  seen,  may  deviate  widely 
from  the  standard  of  cost  of  production.     Among  other 

'  Loc.  cit..  p.  i()Q. 

-  Cf.  his  Silver  Siliiation.  187S  to  i8qi  do  not  nive  time  cnouK'h  for  qiiuntity 
of  money  to  (ioininute  volumt'  of  credit,  in  his  e\iM)sitionI 


normal"    VS     "  TKANSITIONAI.  '   TENDENIIKS        ly.^ 


causes  of  fluctuation,  one  we  have  found  to  be,  the  quantity 
of  money  in  circulation.  Other  things  being  the  same,  an 
increase  of  the  money  in  circulation  raises  prices,  a  diminu- 
tion lowers  them.  If  more  money  is  thrown  into  circula- 
tion than  the  quantity  which  can  circulate  at  a  value  con- 
formable to  its  cost  of  production,  the  value  of  money,  so 
long  as  the  excess  lasts,  will  remain  below  the  standard 
of  cost  of  production,  and  general  prices  will  be  sustained 
above  the  natural  rate."  '  I  pause  to  note  that  it  is  really 
strange  that  a  single  name  should  describe  theories  so  differ- 
ent, resting  on  such  essentially  different  logic.  Long  run 
or  short  run  theories,  all  are  "quantity  theories,"  whether 
"money"  be  defined  as  gold,  or  as  all  manner  of  media  of 
exchange,  or  as  only  those  media  of  e.xchange  which  pass 
from  hand  to  hand  without  endorsement.  Fisher  would 
doubtless  call  his  theory  a  long  run  theory.  From  the 
standpoint  of  the  notion  that  "prices  ...  lag  behind  their 
full  adjustment  and  have  to  be  pushed  up,  so  to  speak,  by 
increased  purchases,"  -  however,  we  get  a  short  run  quan- 
tity theory  doctrine.  The  logic  of  these  two  is  very  differ- 
ent. The  short  run  doctrine  seeks  to  explain  the  actual 
process  of  price-making  in  the  market.  Money  is  offered 
against  goods,  and  the  actual  quantities  on  each  side  de- 
termine the  momentary  price-level,  concretely.  Or,  when 
credit  is  considered,  money  and  credit  offered  against 
goods,  at  a  given  time,  or  in  a  given  short  period,  determine 
the  actual  price-level  reached.  This  is  the  logic  of  the 
equation  of  exchange — actual  money  paid  is  necessarily 
equal  to  actual  money  received.  The  long  run  doctrine 
is  fundamentally  based  on  a  different  notion.  Surrender- 
ing the  actual  or  average  of  price-levels  to  other  causes,  in 
part,  it  still  asserts  that,  given  time  enough,  and  barring 
new  disturbing  tendencies,  a  price-level  will  ultimately  be 
'  Mill,  Principles,  Bk.  Ill,  ch.  12,  par.  i.  -  Fisher,  loc.  cil.,  p.  62. 


I'M 


THF.    VALUE   OF    MONKY 


I 


if.     ■ 

■{!■ 

•  i' 
t 


5!     ' 


reached  which  will  bear  it  out.     I  find  no  recognition,  on 
Fisher's  part,  of  the  fact  that  these  two  doctrines  are  differ- 
ent, and,  in  fact.  I  find  them  blended  and  confused  in  the 
course  of  his  argument.     lit  would  doubtless  maintain 
that  his  is  a  long  run  doctrine.     But  how  long  is  the  "  run  "? 
Sometimes  it  seems  to  be,  as  already  shown,  a  whole  busi- 
ness cycle.     Sometimes  a  passing  season,  as  the  fall.    When 
he  undertakes  to  apply  his  theory  to  a  i)ractical  proposal 
for  regulating  the  value  of  money,  he  relies  on  the  quantity 
theory  tendency  to  bring  alxjut  adjustments  so  quickly  that 
it  is  worth  while  to  make  monthly  adjustments  in  anticipa- 
tion of  it.'    When  discussing  the  changes  in  gold  premium 
on  the  Greenbacks  during  the  exciting  times  of  the  Civil 
War,  he  relies  so  thoroughly  on  his  theory  that  he  will  not 
allow  even  the  rapid  change  of  four  per  cent  in  a  single 
day  following  Chlckaniauga  to  occur  except  in  conformity 
with  the  quantit.    theory.    This  last  statement  is  so  re- 
markiible  that   I  must  quote  Fisher  himself:  "It  would 
be  a  grave  mistake  to  reason,  because  the  losses  at  Chicka- 
mauga  caused  greenbacks  to  fall  4*^0  ^^  'i  single  day,  that 
their  value  had  no  relation  to  their  volume.    This  fell 
indicated  a  slight  acceleration  in  the  velocity  of  circulation, 
and  a  slight  retardation  in  the  volume  of  trade"  (:?0,5).     It 
would  be  indeed  remarkable  if  the  changes  in  the  gold 
market,  which  got  war  news  before  the  newspapers  got  it, 
and  where  changes  in  gold  premium  occurred  before  the 
rest  of  the  country  could  possibly  react  to  the  war  news, 
should  be  controlled  by  V  and  T!    I  had  not  supposed  that 
the  most  rigorous  of  short  run  quantity  theorists  would 
make  any  such  demands  on  his  theory  as  that.     Indeed,  I 
had  not  supposed   that  the  quantity  theory  would   feel 
called  on  to  explain  the  gold  premium,  as  such,  except  in 
so  far  as  the  gold  premium  is  an  index  of  general  prices. 
'  "A  Com|K;nsated  iJollar,"  Quart.  Jour,  of  iUon.,  Feb.  1913. 


~^SB=rS35?^.-?-J^tSS3 


"NOkMAI."   VS.    "transitional"   TENDENCIES        195 

Finding  it  impossibk-  to  limit  Fisher  to  any  single  state- 
ment of  the  (juantitativo  Importance  of  his  normal  theory 
as  (omoared  with  the  other  tenden  I's  at  work,  but  con- 
cluding that,  on  the  whole,  he  considers  it  of  high  imjwr- 
tance,  I  shall  now  j)roceed  to  an  analysis  of  the  reasoning 
by  which  he  seeks  to  justify  it  as  a  qualitative  tendency.  I 
shall  maintain  that,  however  long  or  short  the  j)eriod  re- 
quired, however  strong  or  weak  the  tendency  he  defends, 
the  reasoning  by  which  he  seeks  to  justify  it  is  unsound, 
and  that  even  as  a  qualitative  tendency,  the  quantity 
theory  is  invalid.  At  a  later  part  of  the  book,  as  in  an 
earlier  part,'  I  shall  undertake  to  find  the  modicum  of  truth 
which  the  quantity  theory  contains,  and  shall  show  that 
no  quantity  theory  is  needed  to  exhibit  this  modicum  of 
truth. 

'  The  chapter  on  "Dodo  Bones,"  supra,  and  the  chapter  on  "The  Quun- 
tity  Theory  and  World  Prices,"  iitfra. 


^  ' 


ij 


,     I 


i! 


I* 


!  I 


I 


CHAPTER   XI 
BARTER 

In  the  statement  of  the  quantity  theory,  the  proviso  is 
commonly  made  that  all  exchanges  must  be  made  by  means 
of  money,  or  of  money  and  bank-credit.  Barter  is  ex- 
ch'ded  by  hypothesis.  If  resort  to  barter  were  possible, 
♦hen  people  might  avert  the  fall  in  prices  due  to  scarcity  of 
money,  or  increase  in  trade,  by  dispensing  with  money  in 
part  of  their  transactions,  and  the  proportional  decrease 
in  prices  which  the  quantity  theory  calls  for  would  be  lack- 
ing. Is  this  assumption  true?  Is  barter  banished  from 
the  modern  world,  or  does  it  remain  reasonably  possible, 
and,  to  a  considerable  degree,  actual? 

Fisher  maintains  the  thesis— the  failure  of  which  he 
admits  would  spoil  the  quantity  theory  ^— that  barter  is 
practically  impossible,  and  negligible  in  modem  business 
life.  "Practically,  however,  in  the  world  to-day,  even 
such  temporary  resort  to  barter  is  trifling.  The  conven- 
ience of  exchange  by  money  is  so  much  greater  than  the 
convenience  of  barter,  that  the  price  adjustment  would  be 
made  almost  at  once.  If  barter  needs  to  be  seriously 
considered  as  a  relief  from  money  stringency,  we  shall  be 
doing  it  full  justice  if  we  picture  it  as  a  safety  valve,  work- 
ing against  a  resistance  so  great  as  almost  never  to  come 
into  operation,  and  then  only  for  brief  transition  intervals. 
For  all  practical  purposes  and  all  normal  cases,  we  may 
assume  that  money  and  checks  are  necessities  for  modern 
trade."  ^ 


f.oc.  (it.,  I),  is'^- 


196 


'  Ibid.,  p.  160. 


BARTER 


197 


This  contention  seems  to  me  untenrble.  I  think  it  can 
casil)'  be  shown  that  barter  remains  an  important  factor 
in  modern  business  life,  especially  if  one  extends  the  term 
barter,  a  little,  lo  cover  various  I'exible  substitutes  for  the 
use  of  money  and  checks  in  erfccting  exchanges.  Clearly 
from  the  standpoint  of  th  present  issue,  mch  an  extension 
of  the  meaning  of  barter  legitimate,  as  any  such  substi- 
tutes would  equally  spoil  ihe  proportionality  in  the  sup- 
posed relation  between  prices  and  money,  or  prices  and 
trade. 

Where  does  one  find  barter?  Well,  not  to  be  ignored 
would  be  the  advertisements  which  fill  many  columns  of 
such  a  paper  as  the  New  York  Telegram  in  the  course  of  a 
week:  "Wanted:  to  trade  a  well-trained  parrot  for  a  violin" 
— a  trade  that  might,  or  might  not,  be  a  wise  one!  There 
is  a  good  deal  of  such  simple  barter  among  the  people. 
Then,  perhaps  more  important,  is  the  regular  practice  of 
sewing  machine,  piano,  automobile,  and  other  similar  com- 
panies of  taking  part  of  the  payment  for  a  new  machine, 
piano,'  or  automobile  in  the  similar  thing  which  the  owner 
is  discarding.  The  old  machine,  piano,  etc.,  are  then  re- 
paired, repainted,  and  sold  again.  This  is  a  very  ex- 
tensive practice.  Again,  there  are  companies  which  com- 
bine the  business  of  wrecking  old  houses  and  building  new 
ones,  who  regularly  take  the  old  materials  as  part  of  their 
pay.  This  is  a  highly  important  feature  of  the  organized 
building  trade  in  great  citie^,  and  is  frequently  done  in 
small  towns.  The  building  trade  is  no  negligible  matter. 
The  "horse-trade"  still  thrives  in  rural  regions,  and  barter 
of  various  kinds,  of  live  stock,  of  grain  and  hay,  of  fresh 
and  cured  meat,  and  of  labor,  is  an  important  feature  in 


'  Or  organs  for  pianos,  etc.    .\  common  practice — less  common  in  the 

Ni>rth  than  formerly     is  the  {)ayment  of  hills  at  country  stores  in  produce 
There  is  not  a  little  barter  at  secomllianil  stores  in  New  York  City. 


m 


m 


iji 


198 


THE   VALUE  OF  MONEY 


rural  life  in  many  sections.  Much  of  agricultural  rent  in 
the  South  is  still  paid  in  kind,  under  the  "share  system." 
Much  labor,  especially  farm  and  domestic  labor,  is  still 
paid  for  partly  in  kind.  Where  pajincnts  for  labor  are 
made  in  orders  on  company  stores,  we  have  again  what  is 
virtually  barter,  from  the  standpoint  of  the  point  at  issue. 
Real  estate  transactions  make  large  use  of  barter.  Farms 
are  exchanged  for  one  another,  with  some  cash  (or  more 
usually,  a  promissory  note)  "to  boot."  The  writer  has 
repeatedly  heard  real  estate  men  say  to  customers:  "I 
can't  sell  it  fcr  you  very  easily,  but  I  can  trade  it  off,  and 
maybe  you  can  sell  what  you  trade  it  for."  This  is  per- 
haps more  frequent  in  rural  real  estate  transactions,  and  in 
the  smaller  cities,  than  in  large  cities,  but  it  is  very  ex- 
tensive in  New  York  City.' 

Again,  when  corporations  are  to  be  combined,  various 
plans  are  possible.  There  may  be  a  merger;  there  may  be 
a  holding  corporation;  there  may  be  a  lease.  If  the  money 
market  is  easy,  one  of  the  former  methods  will  be  used, — 
most  frequently,  for  legal  reasons,  the  hold  iig  co'poration, 
if  there  are  any  valuable  franchises  involved.  But  mergers 
and  holding  corporations  commonly  involve  buying  out 
the  interests  which  are  to  be  absorbed,  and  call  for  the  use 
of  checks.  If  the  'noney  market  is  tight,  therefore,  the 
promoter  of  the  combination  may  frequently  find  the  lease 
the  more  advantageous  form  of  consolidation.-  The  great 
advantage  of  the  lease  is  that,  when  the  money  market  is 
tight,  it  involves  no  financial  plan,  no  underwriting,  no 
outlay  of  "cash."    This  is,   therefore,  an  equivalent  of 

1  Mr.  Burton  Thomi)son,  of  Xo.  7  Wall  St.,  who  knows  the  rtal  estate 
situation  thcrt'  intimately,  states  that  while  dealers  do  not  like  to  "swap"  real 
estate,  and  do  little  of  it  when  business  is  good,  they  are  forced  to  do  it  ex- 
tensively when  business  is  sluggish,  "as  has  been  the  case  for  the  past  four 
or  fue  years." 

*r/.  K.  S.  Meade,  Corporation  FiiKiiuc,  p.  37(),  and  passim. 


BARTER 


199 


barter,  so  far  as  the  point  at  issue  is  concerned.  Even 
where  a  holding  coq  iration  is  formed,  however,  there  may 
be  considerable  barter:  the  stockholders  of  the  corporation 
which  is  absorbed  may  receive  payment  for  their  stocks,  in 
whole  or  in  part,  in  the  securities  of  the  holding  company, 
rather  than  in  checks.  An  era  of  financial  consolidation, 
such  as  we  have  been  passing  through,  and  through  which 
we  have  not  by  any  means  gone,  though  the  movement 
toward  monopoly  has  been  in  great  degree  checked,  presents 
a  great  deal  of  this  sort  of  barter,  or  equivalents  of  barter.^ 
A  striking  thing  to  notice  here,  moreover,  is  the  flexible 
margin  between  use  of  bank-credit  and  barter,  a  margin 
depending  primarily  upon  the  condition  of  the  money 
market,  and  particularly  upon  the  money-rates. 

Not  jet  has  the  most  important  element  in  modem 
barter  been  mentioned.  I  refer  to  the  "clearing-house" 
arrangements  of  the  stock  and  produce  exchanges.  Under 
these  arrangements,  brokers  who  have  sold  ten  thousand 
shares  of  Westinghouse  El.  and  M.  Common  during  the 
day,  and  bought  seven  thousand  shares,  buying  and  selling 
being  in  smaller  lots,  with  a  number  of  different  houses,  no 
longer  are  obliged  to  deliver  ten  thousand  shares,  receiv- 
ing therefor  $700,000,  and  to  receive  seven  thousand  shares, 
paying  therefor  $490,000.  Instead,  they  deliver  three 
thousand  shares  only  to  the  clearing  house,  and  receive 
from  the  clearing  house  only  $210,000  when  the  transac- 
tion is,  from  the  standpoint  of  the  particular  broker  in- 
volved, completed.  This  is  a  far  remove,  in  technical 
perfection,  from  primitive  barter,  but  it  is  barter,  and  it 

'  The  same  thing  often  happens  when  a  bond  issue  is  paid  off — bond- 
holders may  take  their  pay  in  new  bonds.  "Conversions"  of  bonds  into 
stocks,  or  of  preferred  into  common  stock,  are  also  barter  transactions. 
$220,oc»,ooo  of  the  S42o.ooo,ocx3  which  Mr.  Carnegie  and  his  associates 
received  from  the  Steel  Trust  for  their  plants,  etc.,  was  ()aid,  not  with  money 
and  checks,  but  with  bonds.  Vide  Stevens,  Industrial  Combinations  and 
Trusts,  p.  loi. 


iiii 


lllij 


t;    , 


11 


I 

I'' 

mi 


•,. ■  -  .\i 


200 


rilK   VALUK  OF   MONEY 


saves  the  using  of  a  vast  deal  of  bank-credit  as  between 
brokers.  How  important  it  is.  from  the  standpoint  of  the 
stock  exchange,  may  be  judged  from  the  following  state- 
ment in  Sprague'sC>/5C5  Under  the  National  Banking  System: 
"A  much  more  fundamental  change  in  the  organization  in 
the  New  York  money  market  came  with  the  establishment 
of  the  stock  exchange  clearing  house  in  May,  1892.  It  led 
to  a  very  considerable  reduction  in  the  clearing-house  ex- 
changes of  the  banks  and  also,  and  more  important,  in  the 
volume  of  certil'ied  checks.  [Italics  mine.]  Over-certifica- 
tion of  checks  ceased  to  be  a  factor  of  the  first  magnitutle 
in  the  banking  methods  of  the  city.  Had  not  this  arrange- 
ment for  stock-exchange  dealings  been  set  up,  it  is  probable 
that  it  would  have  been  necessary  to  close  the  stock  ex- 
change in  1893  and  in  1907,  and  it  is  also  probable  that 
the  volume  of  business  tran.sacted  in  the  years  after  1897 
could  not  have  been  handled."    (P.  152.) 

The  same  arrangements  have  been  widely  introduced 
in  other  stock  exchanges,  and  in  the  produce  exchanges.' 

'  The  foregoing  had  been  writtL-n  Iwfore  the  discussion  in  the  Annalist  of 
Uh  and  March,  1916  (pp.  ,8,5-184.  -'45--'72.  313-J1-,  ,U4-  377),  in  which 
I  rofessor  I-isher  and  the  |)rfsent  writer  joined  issue  with  reference  to  Pro- 
fessor Fisher's  estimate,  j8;  bllHons,  for  the  volume  of  trade  in  the  United 
States  m  Kjcjg.  The  present  writer  contended  that  the  hanking  transactions 
which  Professor  Fisher  took  as  reprcsintati\e  of  trade  greatly  overcounted 
trade,  since  they  included  loans  and  ret)avments,  taxes,  several  checks 
m  one  trans;iction,  gifts,  etc.,  etc.  Professor  Fisher  contended  that  the 
oxercounting  was  offset  by  undercounting,  and  instanced  particularly  the 
clearing-house  arrangements  in  the  speculative  exchanges,  where  checks 
arc  m  part  dis|)ensed  with,  and  the  offsetting  in  "running  accounts"  through 
book-credit.  This  indicates  a  substantial  change  in  IVofessor  Fisher's  \iew 
as  compared  with  that  set  forth  in  the  PiinlmsiuR  P,nc<r  of  Sfoncw  where 
he  maintains,  as  shown  above,  that  barter  is  virtually  non-e.vistent,  that 
money  and  checks  arc  "for  all  (.ractical  pur|H)ses  ,ind  all  normal  cases" 
'necessities  of  modern  trade,"  {|>.  160),  and  that  book  .redit  merely  jK)st- 
|M)nes,  and  clocks  not  dis|)ense  with,  the  use  of  money  and  checks  (p.  570) 

I'hc  e.vtent  of  the  offsetting  by  barter,  clearing-houses  in  the  exchanges 
and  lK)ok-credit,  though  very  great,  is  (|uite  small  as  com|)ared  with  Pn.- 
ltr,sor  l-ishers  .^.S?  billions,  and  docs  not  nearly  offset  the  osercounting 
.rhe  writer  has  obtained  some  fairl>  detinite  data  on  this  |)oint,  which  will 


BARTER 


20t 


In  general,  with  reference  to  barter,  this  point  is  signifi- 
cant. The  money  economy  has  made  barter  easier  rather 
than  harder.  It  has  made  possible  a  host  of  refinements 
in  barter,  which  make  it  at  many  points  more  convenient 
and  cheaper  than  check  or  money  exchanges.  It  is  com- 
mon to  find  our  present  methods  of  conducting  foreign 
trade  described  as  a  "system  of  refined  barter,"  which  i- 
deed,  from  the  standpoint  of  the  present  issue,  it  is:  bills  of 
exchange  are  neither  money  nor  bank-credit !  Where  bills 
of  exchange  are  used  in  internal  trade  extensively— as  in 
Germany,  where  they  pass  from  hand  to  hand  in  several 
transactions  before  being  discounted  at  banks  ' — we  have 
a  highly  important  substitute  for  money  and  deposits, 
which  functions  as  barter, — flexibility  of  substitutes  for 
money  and  deposits  is  strikingly  evident.  The  feature  of 
the  money  economy  which  has  thus  refined  and  improved 
barter  is  the  standard  of  value  (common  measure  of  value) 
function  of  money.-  This  standard  of  value  function,  be 
it  noted,  makes  no  call  on  money  itself,  necessarily.  The 
tnedium  of  exchange  and  "  bearer  of  options  "  functions  of 
money  are  the  chief  sources  of  such  additions  to  the  value 
of  money  as  come  from  the  money-use.  But  the  fact  that 
goods  have  money-prices,  which  can  be  compared  with 
one  another  easily,  in  objective  terms,  makes  barter,  and 
barter-equivalents,  a  highly  convenient  and  very  impor- 
tant feature  of  the  most  developed  commercial  system. 
And  so  we  reject  another  essential  assumption  of  the 
quantity  theory.' 

be  presented  in  the  chapter  on  "Statistical  Demonstrations  of  the  Quantity 
Theory,"  in  discussing  the  volume  of  trade. 

'  M iscellaneous  Articles  on  German  Banking,  Report  of  National  Mone- 
tary Commission,  p.  175.    Cf.  infra,  pp.  288-2QO. 

*  Cf.  our  chapter  on  "The  Functions  of  Money,"  infra. 

'One  familiar  feature  of  corixjration  tinamc  makes  barter  much  pref- 
erable to  money  transactions,  in  one  connection,  which  involves  very  many 
<iir|H)rations  indeed,  at  their  inception.    Stock,  in  order  to  be  marketable, 


'H 


II! 


202 


THE   VALUE  OF  MONEY 


must  be  "full-paid  an.l  tion  asscss;ible."  If  the  conmrafion  sells  its  stock 
to  the  first  stockholders,  thi/i  means  that  money  must  he  paid  for  it  to  the 
full  par  value,  dollar  for  dollar.  This  is  usually  not  easy.  An  esiK-cial  dif- 
ficulty would  then  present  itself  that  the  |)romotor  would  ha\c  trouble  in 
getting  any  pay  for  his  work.  (Meacie,  Vorporation  l-'inamc.  passim;  Sulli- 
van, Amvrican  Citrponitious.  passim.)  If,  howe\er,  the  stocks  are  paid  for 
in  goods  and  sfrvin-s,  the  courts  are  much  less  exacting  in  lix)king  to  see  if 
full  value  has  been  rccei\ed.  Harring  obvious  fraud,  the  courts  will  usually 
count  the  stock  full  paid  and  non-assessable  even  though  the  value  of  the 
goods  and  services  received  is  not  very  great.  The  first  sale  of  the  stocks 
of  a  new  conwration,  therefore  (if  it  is  imi>ortant  enough  to  wish  to  have 
a  public  market  for  its  stocks),  is  a  barter  transaction,  as  a  rule. 


:  I 


.JIIB' ;  t 

i 


CHAPTER  Xn 


VELOCITY  OF  CIRCULATION 

For  the  quantity  theory,  it  is  important  to  treat  velocity 
of  circulation  of  money  and  of  deposits,  as  self-contained 
entities,  really  independent  factors.  This  is  true  of  Fisher's 
theory.  It  is  particularly  necessary  that  V  and  V  should 
vary  from  causes  unconnected  with  M  and  M'.  The  V's 
are  to  be  a  sort  of  inflexible  channel,  through  which  M  and 
M'  run  in  their  influence  on  the  passive  P,  which  is  to  rise 
or  fall  proportionately  with  them.  If  an  increase  of  M  or 
M'  should  lead  to  a  reduction  in  the  V's,  if  people,  having 
more  money  available,  should  be  less  assiduous  in  using 
every  bit  of  it  in  efTecting  exchanges,  then  P  would  not  rise 
in  proportion  to  the  increase  in  M.  Complete  demonstra- 
tion of  Fisher's  thesis,  therefore,  requires  the  proof  of  the 
negative  proposition  that  V  does  not  change  as  a  conse- 
quence of  changes  in  M  or  W.  This  proof  Fisher  finds  in 
the  contention  that  the  V's  arc  fixed  by  the  habits  and  con- 
veniences of  individuals,  whence  they  are  not  influenced  by 
such  a  cause  as  a  change  in  the  amount  of  money  ' 

V  is  defined, 2  not  as  the  number  of  times  a  given  dollar  is 
exchanged  in  a  given  year  (the  "coin-transfer"  notion), 
but  as  a  social  average  based  on  the  average  number  of 
coins  which  pass  through  each  man's  hands,  divided  by  the 
average  amount  held  by  him  (the  "person- turnover"  con- 
cept of  velocity.)  V  is  similarly  defined.  Fisher  asserts 
that  both  concepts,  if  correctly  employed,  lead  to  the  same 
result.    I  would  point  out  one  important  difference  between 


'  Purchasing  Power  of  Money,  p.  152. 

203 


*Ibid.,  pp.  352  el  seq. 


204 


TIIK    VAI.IJK    OF    MONKY 


them  here:  if  money  is  sliorl-circnitcd,  if.  /.  c,  a  part  of  the 
economic  community  loses  its  incomes,  or  iinds  its  incomes 
reduced,  then  the  "velocity  of  money,"  on  the  "coin- 
transfer"  basis  is  reduced,  provided  the  "person-turnover" 
average  remains  the  same,  while  on  the  "person-turnover" 
basis  the  velocity  will  remain  unchanged.  It  is  clearly  the 
"coin-transfer"  concept  which  is  fundamental,  from  the 
standpoint  of  the  equation  of  exchange,  and  Fisher  feels  jus- 
tified in  using  the  other  method  only  because  he  considers  it 
an  equivalent  of  the  "coin-transfer"  concept.  I  shall  later 
show  cases  where  the  distinction  between  the  two  con- 
cepts is  all-important,  particular!)-  in  the  case  where  T  is 
reduced  by  the  elimination  of  middlemen} 

The  conception  of  velocity  of  circulation  as  a  real,  unitary 
entity,  a  cause,  in  the  process  of  price-determination,  is, 
I  suppose,  almost  as  old  as  the  quantity  theory  itself.  It 
is  an  essential  part  of  the  quantity  theory.  To  me  "veloc- 
ity of  circulation"  seems  to  be  a  mere  name,  denoting,  not 
any  simple  cause  or  small  set  of  causes,  which  can  exert 
a  specific  influence,  but  rather  a  meaningless  abstract  num- 
ber, which  is  the  non-essential  by-product  of  a  highly 
heterogeneous  lot  of  activities  of  men,  some  of  which  work 
one  way,  and  others  of  which  work  in  another  way,  in 
affecting  prices.  It  is  at  best  a  passive  resultant  of  con- 
flicting and  divergent  tendencies,  and  has,  to  my  mind,  no 
more  causal  significance  than  the  average  of  the  abstract 
numbers  of  yards  gained  by  both  sides,  heights  and  weights 
of  players,  kick-offs,  and  minutes  taken  out  for  injuries, 
would  have  on  the  result  of  the  Vale-Harvard  game.  The 
real  causes  of  changes  in  prices  lie  fleeper!    I  should  expect 

'  /;(/><(,  ch.  on  "  P;is.sivcncs.s  of  Prices."  Wdnlited  averaRcs  of  "  per-^'n- 
turnovers  "will  not  kivc  tho  •<itiiati(,n  here,  if  incomes  stop  entirely,  simc 
the  persons  involved  then  drop  out  ultoKether.  Moreover,  iccighlrd  a\  erases 
would  clearly  depend  on  iiuowes.  and  hence  on  prhes,  and  hence  could  not 
depend  on  habits  exclusively,  or  causally  explain  prices. 


VELOdTY   OF   CIKCULATION 


205 


V  and  V  to  be  the  most  highly  flexible  factors  in  the  equa- 
tion of  exchange,  and  should  expect  to  be  able  to  keep  the 
equation  straight,  in  a  great  variety  of  situations,  by  allow- 
ig  the  V's  to  vai-y. 
Before  undertaking  detailed  analysis  of  the  causes  gov- 
erning V,  I  shall  discuss  Fisher's  specific  argument,  t>pical 
of  the  quantity  theory,  that  an  increase  of  money  cannot 
change  the  V's.    "As  a  matter  of  fact,  the  velocities  of 
circulation  of  money  and  deposits  depend,  as  we  have  seen, 
on  technical  conditions,  and  bear  no  discoverable  relation 
to  the  quantity  of  money  in  circulation.    Velocity  of  circu- 
lation is  the  average  rate  of  'turnover,'  and  depends  on 
countless  individual  rates  of  turnoVer.    These,  as  we  have 
seen,  depend  on  individual  habils.    Each  person  regulates 
his  turnover  to  suit  his  individual  convenience.  ...    In 
the  long  run,  and  for  a  large  number  of  people,  the  av- 
erage rate  of  turnover,  or  what  amounts  to  the  same 
thing,  the  average  time  money  remains  in  the  same  hands, 
will  be  closely  determined.     It  will  depend  on  density  of 
population,  commercial  customs,  rapidity  of  transport,  and 
other  technical  conditions,  but  not  on  the  quantity  of 
money   and    deposits   nor   on   the  price-level."     (Italics 
mine.*)    He  proceeds  to  assume  that  money  is  doubled 
with  a  halving  of  the  V's,  insl   id  of  a  doubling  of  P.    Every- 
body now  has  on  hand  twice  as  much  money  and  deposits 
as  his  convenience  has  taught  him  to  keep  on  hand.    He 
will  then  try  to  get  rid  of  this  surplus,  and  he  can  only  do 
it  by  buying  goods.    But   this  will  increase  somebody 
else's  surplus,  and  he  will  likewise  try  to  get  rid  of  it.    This 
will  raise  prices.     "Obviously  this  tendency  will  continue 
until  there  if  found  another  adjustment  of  quantities  to  ex- 
penditures, and  the  V's  are  tlw  same  as  originally."  ^    The 
foregoing  argument  rests  in  part,  it  will  be  seen,  on  the 

'  Loc.  cU.,  PI).  15  J  -15,^  2  Ibid.,  p.  154.    Italics  mine. 


.•■    !■ 


m 


206 


THK    VALUK   OK    MONKY 


assumption  that  a  fixed  ratio  hctwcTn  M  and  M'  obtains, 
else  the  increase  of  money  in  everybody's  hands  would  not 
mean  a  corresponding  increase  in  their  deposits.  I  have 
already  criticised  this  doctrine.  Tor  the  contention  that 
the  V's  will  finally  hvjitsl  Ihc  same  as  before,  I  find  no  spe- 
cific argument  at  all  "ohiously"  presumably  making  that 
unnecessary. 

As  the  point  immediately  at  issue  is  that  V^'s  will  be 
unchanged  b}'  the  increase  in  M  (otherwise  P  would  not 
increase  proportionately— \ci  us  see  if  considerations  can 
be  adduced  which  will  make  this  a  little  less  "obvious." 
First,  it  will  be  noticed  that  Fisher,  in  the  foregoing,  in  one 
sentence  speaks  of  the  matter  as  resting  on  habit,  and  in  the 
ne.xt  sentence,  on  convenience.  He  .speaks,  also,  of  business 
custom.  Now  it  is  important  to  note  that  habit  and  cus- 
tom, on  the  one  hand,  and  considerations  of  convenience 
on  the  other,  do  not  necessarily  coincide.  Many  habits 
and  customs  are  highly  inconvenient.  And  it  is  not  at  all 
likely  that  habit  and  custom  should  govern  so  highly  com- 
plex a  thing  as  the  ratio  between  cash  on  hand  and  the 
price-level.  Rather,  in  so  far  as  custom  and  habit  rule, 
one  would  e.xpect  them  to  relate  to  a  simpler  matter, 
namely,  the  amount  of  cash  on  hand.  If  the  amount  of 
cash  kept  on  hand  should  remain  controlled  by  habit, 
while  the  amount  of  money  is  increased,  then  V,  instead  of 
remaining  unchanged,  would  actually  be  increased,  unless 
the  habits  should  be  broken  in  on.  I  shall  show  in  a  mo- 
ment that  considerations  of  convenience  would  probably 
lead  to  a  reduced  V,  in  so  far  as  individual  turnover  is  con- 
cerned. But  which  tendency  will  prevail?  Well,  that 
will  depend  on  the  degree  to  which  custom  and  habit  rule 
as  compared  with  considerations  of  convenience — i.  e.. 
there  would  be  no  rule  valid  for  all  communities.  That 
convenience  would  lead  to  a  larger  amount  of  money  on 


VELOCITY  OF  CIRCULATION 


207 


hand— and  I  am  following  Fisher's  temporary  hypothesis 
that  there  has  been  no  rise  in  i)rices  prior  to  the  movemfmt 
to  restore  the  V's  to  their  old  magnitudes  -will    1  -pear 
from  considerations  like  these.     Few  men  have  as  much 
on  hand  as  they  would  like  to  have,  including  lx)th  their 
cash  in  hand  and  their  deposit  balances.     Most  people 
have  the  tendency  to  hoard,  though  it  is  usually  held  in 
check  by  necessity.     If  money  on  hand  be  increased  sud- 
denly, without  prices  being  increased,  and  without  any 
prospect  of  increased  incomes  in  the  future— and  there  is 
nothing  in  Fisher's  provisional  hypothesis  to  call  for  in- 
creased incomes,  as  they  could,  in  fact,  come  only  from  an 
increase  in  prices— why  might  not  there  be  a  considerable 
saving  of  money,  with  a  corresponding  reduction  in  V?    If 
it  be  objected  that  people,  in  saving  their  money,  will  in 
considerable  degree  put  it  into  the  banks,  and  that  the 
banks,  with  larger  reserves,  will  increase  loans  and  deposits, 
I  would  urge,  that  it  is  on  the  part  of  banks  that  this  tend- 
ency to  increase  hoards  in  times  of  abundant  money  is 
particularly  marked,  and  for  proof  would  point  to  the 
figures  quoted  from  Keynes  *  for  the  great  banks  and 
treasuries  of  Europe  in  the  last  fifteen  years.    It  is  not 
necessary  for  my  purpose  at  this  point  to  do  more  than 
show  that  there  is  reason  to  expect  an  increase  in  money  to 
change  the  Vs.    Fisher's  argument  rests  on  the  contention 
that  the  V's  will  be  neither  increased  or  reduced — other- 
wise an  increase  in  money  will  not  proportionately  raise 
prices.    The  appeal  to  habit  and  custom  in  the  matter  is 
particularly  unsatisfactory.     Custom  and  habit  could  not 
possibly  regulate  things  so  complex  as  velocities  of  money 
and  bank-deposits. 
Whatever  be  the  ultimate  effect  of  an  increase  in  money, 

» Supra,  ch.  on  "  Volume  of  .Money  and  Volume  of  Credit."  Infra,  ch.  on 
"  Bank  .Assets  and  Bank  Reserves." 


,ii 


!f 


?o.S 


THi:   V\I.rF   OF   MONEY 


thi'  immi'diatc  (.fTect  is  tonimonly  to  reduce  the  money- 
ratis.  Banks  have  less  indueemenl  to  pay  interest  on 
deposits,  and  charge  lower  rates  for  loans.  Now  mt.'r- 
ihants,  esjxcially  small  merchants,  arc  often  embarrassed 
in  making  change  for  customers.  The  man  who  has  tried 
to  make  payment  with  a  ten  dollar  hill  in  a  country  store 
has  not  infreciuently  jnit  the  storekeeper  to  much  incon- 
venience. To  offer  a  ten  dollar  bill,  or  even  a  five  dollar 
bill,  to  a  storekeeper  on  Amsterdam  Avenue  in  New  ^'ork 
("ity  may  well  mean  that  the  one  clerk  in  the  establishment, 
or  the  proprietor's  wife  will  run  out  with  the  bill  to  three  or 
four  neighboring  stores  before  finding  change  with  which  to 
break  it.  If  money  is  more  abundant,  if  money-rates  are 
easi  r,  for  a  time,  it  may  easily  happen  that  many  small 
merchants  will  experience  the  superior  convenience  of  hav- 
ing a  more  adequate  amount  of  change  in  the  till,  and 
will,  even  after  the  money-rates  have  risen— if  they  do 
rise  again  to  the  old  figure — find  a  new  reason  for  keep- 
ing more  cash  on  hand.  There  is  a  marginal  equilibrium 
between  the  interest  on  the  capital  invested  in  cash  in  the 
till,  and  the  wages  of  the  clerk,'  whose  active  legs  assist 
the  velocity  of  money.  Not  only  banks  and  small  dealers, 
however,  find  it  advantageous  to  increase  their  supply  of 
ready  funds,  held  idle  for  special  occasions.  The  United 
States  Steel  Corporation  has  kept  as  much  as  $50,000,000.00 
to  $75,00,000.00  in  idle  cash  or  idle  deposits,  as  a  means  of 
being  independent  of  banks  in  times  of  emergency.  ^  The 
motive  for  accumulating  reserves  and  hoards,  either  of 
cash  or  deposit  accounts,  is  at  all  times  strong.  In  times 
of  financial  ease,  it  may  easily  find  the  difficulties  which 

'  Cf.  Kinley,  Money,  pp.  145  and  205-206,  for  the  discussion  of  various 
moveable  margins  of  this  sort. 

•  Van  Hise,  Conanlralioii  ami  Control,  p.  i6.  I'he  tendency  to  accumu- 
late hoards  when  money  is  plentiful  is  notoriously  strong  in  countries  like 
India. 


VEUKITY   or  CIRCULATION 


309 


ordinarily  repress  it  give  way,  and.  by  being  grai:  icd, 
grow  stronger. 

I  conclude  that  there  is  positive  rca^on  for  expecting  an 
increase  of  money  to  reduce  the  velocity  of  money. 

Horace  White,  in  his  Money  and  Banking,  in  the  earlier 
editions,  speaks  of  the  velocity  of  money,  "alias  the  state 
of  trade."  Is  not  this  the  truth?  Is  not  money  circulat- 
ing rapidly  when  business  is  active,  and  slowly  when  busi- 
ness is  dull?  Is  not  the  velocity  of  circulation  a  highly 
flexible  and  variable  average,  a  cause  of  nothing,  and  an  in- 
dex of  business  activity?  Or.  better,  perhaps,  arc  not  the 
V's  and  T  both  governed,  in  large  degree,  by  more  funda- 
mental causes  which  are  largely  the  same  for  both?  Fisher 
would  admit  something  of  this  for  transition  periods. 
Even  for  normal  adjustments,  he  admits  that  an  increase 
in  T.  unaccompanied  by  an  increase  in  M,  leads  to  some 
increase  in  the  V's,  though  he  doesn't  say  how  much.' 
He  denies,  however,  that  an  increase  in  the  V's  will  increase 
T.*  In  general,  it  is  clear  that  he  regards  the  V's  and  T  as 
governed  by  different  causes.  The  control  of  the  V's  by  T 
is  not  the  only  or  the  chief  control  of  the  V's.  The  V's 
can  increase  greatly  without  an  increase  of  T,  in  his  scheme. 
That  this  is  so.  will  appear  from  a  comparison  of  the  list  of 
causes  which  he  gives  as  governing  the  V's  and  T  respec- 
tively: 

Causes  governing  V's: 

1.  Habits  of  the  individual. 

(a)  As  to  thrift  md  hoarding. 

(b)  As  to  book  credit. 

(c)  As  to  use  of  checks. 

2.  Systems  of  payments  in  the  community. 

(a)  As  to  frequency  of  receipts  and  disbursements. 

'  Loc.  cil.,  pp.  167-168.  -  Ibid.,  p.  164. 


2IO 


THE   VALIT-;   OF  MOXEY 


I 

'  I 
ti  I 

if 


(b)  As  to  regularity  of  receipts  and  disbursements. 

(c)  As  to  correspondence  between  times  and  amounts 
of  receipts  and  disbursements. 

3.  General  causes. 

(r.)  Density  of  population, 
(b)  Rap:'  lity  of  transportation. 

Compare  this  list  with  the  causes  governing  T:  ^ 

1.  Conditions  affecting  producers: 

Geographical  differences  in  Natural  Resources;  the 
division  of  labor;  knowledge  of  technique  of  pro- 
duction; accumulation  of  capital. 

2.  Conditions    affecting    consumers:    the    extent    and 

variety  of  human  wants. 

3.  Conditions  connecting  consumers  and  producers: 

(a)  Facilities  for  transportation. 

(b)  Relative  freedom  of  trade. 

(c)  Character  of  monetary  and  banking  systems.  (Not 
their  extent.) 

(d)  Business  confidence. 

These  two  lists  are  quite  different,  and  indicate  that  in 
Fisher's  mind  the  magnitudes,  T  and  the  V's,  in  general 
obey  different  laws.  The  only  factor  in  both  lists  is  facil- 
ities for  transportation  ("rapidity  of  transportation,"  in 
the  first  list).  Strangely  enough,  T,  though  later  recog- 
nized as  having  influence  on  the  V's  ^  is  not  included  in 
these  lists  in  ch.  5.  The  "character  of  the  monetary  and 
banking  systems"  in  the  second  list  is  evidently  not  the 
same  as  "use  of  checks"  in  the  second  list,  though  it  will 
doubtless  affect  that  factor,  as  also  the  "habits  as  to  thrift 
and  hoarding,"  in  some  degree.    "Business  confidence," 

'  (/.  liavcniKjrt's  analysis  of  the  causes  governing  volume  of  trade,  Eco- 
iwmiis  i.f  Eu'irprisc,  p.  272. 
^  Loc.cU.,  p.  no. 


VELOCITY  OF  CIRCULATION 


211 


which  is,  in  the  view  I  am  maintaining,  as  in  the  view,  I 
should  take  it,  of  Horace  White,  the  great  variable  affect- 
ing both  T  and  the  V's,  does  not  appear  in  the  first  list. 
Indeed,  one  wonders  why  business  confidence  appears  in 
either  list,  if  only  "normal,"  and  not  merely  "transitional" 
causes  are  to  be  considered,  but  it  appears  from  the  fuller 
discussion  on  p.  78  that  Fisher  is  not  thinking  of  business 
confidence  as  a  variable  at  all — his  normal  theory  has 
nothing  to  do  with  variables—hut  as  a  thing  which  either 
is  or  is  not  present,  a  sort  of  Mendelian  unit,  not  a  thing  of 
degrees.'  It  will  be  noted,  further,  that  most  of  the  causes 
wliich  Fisher  lists  as  affecting  T  are  really  causes  affecting 
production— they  would  be  just  as  important  under  a 
socialistic  as  under  an  exchange  economy. 

Now  I  propose  to  show,  on  the  basis  of  Fisher's  own  list 
of  causes,  that  most,  if  not  all,  of  the  factors  affecting  the 
V's,  will  also  affect  T,  and  in  tlie  same  direction.  He  admits 
this  as  to  transportation  facilities.  It  is  surely  true  of 
thrift  and  hoarding.  The  miser  neither  circulates  money 
nor  buys  goods.  It  is  emphatically  true — though  Fisher's 
theory,  as  will  later  appear,  is  obliged  to  deny  it, — of  both 
book  credit  and  banking  facilities.  Without  the  use  of 
credit,  much  of  the  business  now  done  simply  would  not 
be  done  at  all.  For  Fisher,  and  the  quantity  theory  in 
general,  the  contention  would  be  simply  that  the  same 
business  would  be  done  on  a  lower  price-level.  I  reserve 
a  full  discussion  of  this  fundamental  point  till  later,  noting 
here,  in  passing,  that  the  function  of  banks  is  to  assist  in 
effecting  transfers,  that  that  is  why,  from  the  social  stand- 
point, banks  are  encouraged,  and  that  the  extension  of 
banking  would  be  folly  if  they  did  not,  in  fact,  do  this.    As 

*  Perhaps  not  quite  correct,  since  ae  does  recognize  differences  in  degree  as 
between  different  places,  though,  perhaps  proiierly,  from  the  standpoint 
of  his  normal  theory,  saving  nothing  about  differences  in  degree  as  between 
different  times  in  the  same  place. 


212 


THE   VALUE   OF   MONEY 


to  book  credit,  let  us  suppose  that,  for  example,  in  the 
great  cotton  section  of  the  South  the  stores  should  cease 
to  give  advances  of  supplies  on  credit  to  negroes  and  small 
white  farmers,  pending  the  "making"  of  the  crop.  The 
outcome  would  be  starvation  for  many  of  them,  and  no 
cotton  crop  at  all.  Under  a  system  of  private  enterprise, 
the  very  division  of  labor  itself,  including  the  specializa- 
tion of  the  capitalist,  involves  credit,  and  it  is  difficult  to 
conceive  a  form  of  credit  which  does  not  either  dispense 
with  the  use  of  money,  or  increase  its  "velocity."  Ad- 
mittedly, the  division  of  labor  increases  trade. 

The  three  factors  listed  under  "Systems  of  payment  in 
the  community"  also  affect  trade.  To  the  extent  that 
receipts  are  frequent,  regular,  and  synchronous  with  outgo, 
we  have  a  smoothly  working  economic  system,  which 
facilitates  commerce. 

Finally,  density  of  population  enormously  increases 
trade.  The  concentration  of  men  in  cities  is  essential  for 
modern  factory  production,  and  the  great  cities  have  nec- 
essarily grown  up  about  good  harbors,  or  at  strategic 
points  for  connecting  lines  of  railroads.  It  seems  almoil: 
trivial  to  insist  on  so  obvious  a  point,  but  Fisher  seems  to- 
tally to  ignore  it,  for  he  says:  "We  conclude,  then,  that 
density  of  population  and  rapidity  of  transportation  have 
tended  to  increase  prices  by  raising  velocities.  Historically 
this  concentration  of  population  in  cities  has  been  an  impor- 
tant factor  in  raising  prices  in  the  United  States."  '  (P.  88. 
Italics  mine.) 

This  is  an  astounding  proposition.  It  is  not  merely  that 
the  concentration  of  population  in  cities  has  tended  to  raise 
prices  through  raising  velocities.  It  is  a  statement  that 
this  has  been  an  important  historical  cause  of  the  actual 


'  ('/.  ;ils<)  p,  315,  lor.  n't.,  where  this  is  [>l:u'e<l  its  one  of  three  main  causes 
01  the  historical  rise  in  prices. 


VELOCITY  OF  CIRCULATION 


ai3 


increase  in  prices.  For  Fisher's  own  theory,  if  the  same 
cause  had  tended  (o  increase  T,"  that  would  have  offset 
the  rising  V's  on  the  other  side  of  the  equation,  and  left 
prices  little  affected.  But  he  sees  in  the  V's  an  independent 
cause  here,  divorces  them  from  their  connection  with  T, 
and  follows  his  logic  feariessly  where  it  leads.  I  do  not 
see  how  one  could  more  strikingly  illustrate  the  essential 
vice  of  erecting  the  V's  into  causal  entities. 

In  concluding  the  discussion  of  the  r61e  of  velocity  of 
circulation,  I  think  it  worth  while  to  mention  Fisher's  own 
efforts  to  measure  them.  I  examine  his  statistics  in  a  later 
chapter.  I  do  not  regard  the  points  at  issue  as  points 
which  can  properiy  be  handled  by  inductive  methods, 
primarily.  I  do  not  accept  his  conclusions  with  reference 
to  the  magnitudes  of  V,  the  velocity  of  money,  partly  be- 
cause I  do  not  accept  his  doctrine  that  "banks  are  the 
home  of  money"  (p.  287). ^  He  finds  for  V  a  fairly  constant 
magnitude  during  the  thirteei  years  from  1896  to  1909,  the 
range  being  from  19  to  22,  the  figures  for  all  the  years  ex- 
cept 1896  and  1909  being  interpolations.'  For  V,  however, 
which  is  much  the  more  important  magnitude,  from  the 
standpoint  of  his  equation  of  exchange  for  the  United 
States,  since  deposits  do  so  much  more  exchanging  than 
does  money,  he  finds  a  wide  range  of  variation,  from  36  to 
54,  and  he  states:  "We  note  that  the  velocity  of  circula- 
tion has  increased  50%  in  thirteen  years  and  that  it  has 
been  subject  to  great  variation  from  year  to  year.  In 
1899  and  1906  it  reached  maxima,  immediately  preceding 
crises"   (285).     I  think  Fisher's  own  statistical  results 


'  That  the  overwhelming  bulk  of  trade  is  in  the  cities  will  appear  in  our 
chapter,  infra,  on  "Volume  of  Money  and  Volume  of  Trades." 

'  On  the  average,  in  the  United  States,  the  banks  have  less  money  than 
the  people  have.     Vide  Mitchell,  Business  Cycles,  pp.  jqi;  and  2q8. 

=  Based  on  arbitrary  assumptions  as  to  variability.  Cf.  his  p.  477. 
if.  our  chapter,  infra,  on  "Statistics  of  the  Quantity  Theory." 


214 


THE  VALXJE  OF  MONEY 


ti  i 


show  that  V,  at  least,  is  a  child  of  the  "state  of  trade."  * 
Critical  analysis  of  these  statistics  show  that  they  greatly 
underestimate  the  variability  of  the  V's.- 

In  summary:  V  and  V  are  not,  as  Fisher  contends,  inde- 
pendent of  the  quantity  of  money.  Instead  of  resting  on 
"technical  conditions,"  and  having  large  elements  of  con- 
stancy and  rigidity,  they  are  highly  flexible,  and  vary,  on 
the  whole,  with  the  same  highly  complex  and  divergent 
sets  of  causes  which  govern  the  voliraie  of  trade.  The 
biggest  factor  affecting  the  variations  of  the  V's  on  the  one 
hand,  and  volume  of  trade  on  the  other  is  business  confi- 
dence— a  factor  which  Fisher's  normal  theory  is  not  con- 
cerned with,  so  far  as  it  is  considered  as  a  variable,  but 
which,  more  than  anything  else,  does  affect  the  concrete 
figures  which  go  into  the  equation  of  exchange,  either  for  a 
single  year,  or  for  an  average  of  a  good  many  years.  The 
V's  are  not  true  causal  entities,  but  merely  abstract  sum- 
maries of  a  host  of  heterogeneous  facts.  I  have  indicated 
before,  and  shall  later  demonstrate  more  fully,  tliat  the 
same  is  true  of  T.  Even  the  "normal"  causes  governing 
the  V's,  however,  are  factors  which  likewise  affect  T,  and 
in  the  same  direction. 

Among  the  factors  affecting  both  V  and  T,  here  is  one 
which  sometimes  makes  them  move  in  opposite  directions, 
and  that  is  the  value  of  numey  itself.  This  is  so  well  stated 
in  Wicksteed's  interesting  criticism  of  the  quantity  theory 
that  I  content  myself  with  a  quotation:  ^  "Again,  the  his- 

'  Other  passages  might  be  cited  to  show  that  Fisher  thinics  that  T  and 
the  V's  are  fundamentally  go\emed  by  different  causes.  For  example,  he 
says  "an  increased  trade  in  the  Southern  States,  where  ^\\t  velocity  of  cir- 
culation of  money  is  presumably  slow,  would  tend  to  lower  the  average 
velocity  in  the  United  States,  simply  by  giving  more  weight  to  the  velocity 
in  the  slower  portions  of  the  country."    Loc.  cit.,  p.  i66. 

•TA.  infra,  our  chapter  on  "Statistical  Demonstrations  of  the  Quantity 
The<iry."' 

'  Common  Sense  of  Political  Economy,  p.  623. 


VELOCITY  OF  CIRCULATION 


215 


tory  of  paper  money  abounds  in  instances  of  sudden 
changes,  within  the  country  itself,  in  the  value  of  paper 
currency,  caused  by  reports  unfavorable  to  the  country's 
credit.  The  value  of  the  currency  was  lowered  in  these 
cases  by  a  doubt  as  to  whether  the  Government  would  be 
permanently  stable  and  would  be  in  a  position  to  honor  its 
drafts,  that  is  to  say,  whether  this  day  three  months,  the 
persons  who  have  the  power  to  take  my  goods  for  public 
purposes  will  accept  a  draft  of  the  present  Government  in 
lieu  of  payment.  It  is  not  easy  to  see  how,  on  the  theory 
of  the  quantity  law,  such  a  report  could  affect  very  rapidly 
the  magnitudes  on  which  the  value  of  the  note  is  supposed 
to  depend,  viz.,  the  quantity  of  business  to  be  transacted, 
and  the  amouiit  of  the  currency.  Nor  is  it  easy  to  see  why 
we  should  suppose  that  the  frequency  with  which  the  notes 
pass  from  hand  to  hand,  is  independently  fixed.  On  the 
other  hand,  the  quantity  of  business  done  by  the  notes,  as 
distinct  from  the  quantity  of  business  done  altogether,  and 
the  rapidity  of  the  circulation  of  the  notes  may  obviously 
be  affected  by  sinister  rumors.  Two  of  the  quantities, 
then,  supposed  to  determine  the  value  of  the  unit  of  circula- 
tion, are  themselves  liable  to  be  determined  by  it." 


CHAPTER  Xiri 

THE  VOLUME  OF  MONEY  AND  THE  VOLUME  OF 
TRADE— TRADE  AND  SPECULATION 

In  proving  that  an  increase  of  money  must  proportion- 
ately increase  prices,  it  is  necessary  to  prove  that  the 
volume  of  trade  is  independent  of  the  quantity  of  money 
and  credit  instruments  by  means  of  which  trade  is  carried 
on.    Money  on  the  one  hand,  and  quantity  of  goods  to  be 
exchanged  on  the  other,  are  the  two  great  independent 
magnitudes,   whose  equilibration  mechanically  fixes   the 
average  of  prices.     This  notion,  as  to  the  essence  of  the 
quantity  theory,  finds  expression  in  Taussig, '  "The  state- 
ment of  a  quantity  theory  in  relation  to  prices  assumes  two 
independent  variables:  total  money  or  purchasing  power 
on. the  one  hand,  total  supply  of  goods  or  volume  of  transac- 
tions on  the  other."    Taussig,  though  he  would  maintain 
that  this  independence  holds,  so  far  as  money  and  trade  are 
concerned,  admits  that  it  breaks  down  so  far  as  trade  and 
elastic  bank  credit,  bank-notes  and  deposits,  are  concerned. 
Trade  and  elastic  bank-credit  are  largely  m/erdependent.- 
This  concession  on  Taussig's  part  means  virtually  giving 
up  the  quantity  theory  for  Western  Europe  and  the  United 
States  and  Canada,  though  Taussig  still  sees  something 
left  of  the  quantity  theory  tendency  in  view  of  the  "irreg- 
ular and  uncertain"  connection  which  he  finds  between 
money  and  bank-credit.''    Fisher,  however,  makes  no  such 

'  Principles,  I,  4,^.?. 

=  /.or.  <-//.,  p{).4.?..,  4  ^8-43q. 

»//)/(/.,  p.  4^<;.  (/  our  <-hai>ter,  M,prd, un  "  Volume  of  Money  and  Volume 
of  Credit,"  where  Taussig's  view  as  lo  the  relation  of  money  and  bank- 
credit  is  analyzed. 

216 


TRADE  AND  SPECULATION 


217 


surrender.  He  is  quite  as  uncompromising  as  to  the  in- 
dependence of  deposits  and  trade  as  "he  is  with  reference 
to  the  independence  of  money  and  trade.  He  does,  in- 
deed, make  the  concession  that  increasing  trade  tends 
to  increase  deposits  indirectly,  by  increasing  the  ratio 
of  M'  to  M,  by  modifying  the  habits  of  the  people  as 
to  the  use  of  checks  as  compared  with  cash  (p.  165),' 
but  he  denies  stoutly  that  there  is  any  direct  relation 
between  them.  (P.  168.)  Trade  acts  only  via  a  modi- 
fication of  the  ratio  between  M  and  M',  and  M  still  re- 
mains controlled,  not  by  trade,  but  by  quantity  of  money. 
As  to  any  control  over  T  by  M',  he  repudiates  it  explicitly, 
(P.  163.)  Increasing  M',  either  through  an  increase  of  M. 
or  through  an  increase  in  the  normal  ratio  between  M  and 
M',  will  have  no  effect  on  T,— or,  for  that  matter,  on  the 
Vs.  The  introduction  of  credit,  therefore,  leaves  the 
quantity  theory  intact:  an  increase  of  M,  increasing  M' 
proportionately,  leaving  the  V's  unchanged,  and  having  no 
effect  on  T,  must  exhaust  its  influence  on  P,  raising  P  pro- 
portionately, if  the  equation  of  exchange  is  to  remain 
valid. 

The  argument  set  forth  to  prove  that  T  is  not  in- 
fluenced by  M  or  M'  is  as  follows:  "An  inflation  of  the 
currency  cannot  increase  the  products  of  farms  or  factories, 
nor  the  speed  of  freight  trains  or  ships.  The  stream  of  busi- 
ness depends  on  natural  resources  and  technical  conditions, 
not  on  the  quantity  of  money.  The  whole  machinery  of 
production,  transportation  and  sale  is  a  matter  of  physical 
capacities  and  technique,  none  of  which  depend  on  the 
quantity  of  money.  The  only  way  in  which  quantities  of 
trade  appear  to  be  affected  by  the  quantity  of  money  is  by 
influencing  trades  accessory  to  the  creation  of  money  and 
to  the  money  metal.  .  .  .  From  a  practical  or  statistical 

'  Loc.  cil. 


2l8 


THE  VALUE  OF  MONEY 


point  of  view  they  amount  to  nothing,  for  they  could  not 
add  to  nor  subtract  one-tenth  of  i%  from  the  general 
aggregate  of  trade."  {Loc.  cit.  p.  155.  Italics  mine.) 
Something  similar  is  said  on  p.  62,  where  "transitional" 
influences  of  M  on  T  are  being  discussed:  "But  the  amount 
of  trade  is  dependent,  almost  entirely,  on  other  things  than 
the  quantity  of  currency,  so  that  an  increase  of  currency 
cannot,  even  temporarily,  very  greatly  increase  trade.  In 
ordinarily  good  times  practically  the  whole  community  is 
engaged  in  labor,  producing,  transporting,  and  exchanging 
goods.  The  increase  of  currenc_.  of  a  "boom"  period  can- 
not, of  itself,  increase  the  population,  extend  invention,  or 
increase  the  efficiency  of  labor.'  These  factors  pretty 
definitely  limit  the  amount  of  trade  that  can  reasonably 
be  carried  on.  So,  although  the  gains  of  the  enterpriser- 
borrower  may  exert  a  psychological  stimulus  on  trade, 
though  a  few  unemployed  may  be  employed,  and  some 
others  in  a  few  lines  induced  to  work  overtime,  and  although 
there  may  be  some  additional  buying  and  selling  which  is 
speculative,  yet  almost  the  entire  effect  of  an  increase  in  de- 
posits must  be  seen  in  a  change  in  prices.  Normally  the 
entire  effect  would  so  express  itself,  but  transitionally 
there  will  be  also  some  increase  in  the  Q's."  (Pp.  62-63. 
Italics  mine.) 

Fisher  is  here  exceedingly  uncompromising,  even  where 
transitional  periods  ate  concerned,  and  it  is  not  necessary, 
in  order  to  do  his  position  full  justice,  to  make  much  dis- 
tinction between  "normal "  and  "  transitional "  effects  in  my 
counter-argument.     I  shall,  however,  take  account  of  the 

'  Virtually  the  same  expression  is  to  be  fount!  in  Barbour,  David,  The 
Standard  of  Value,  London,  1912.  p.  45.  Barbour  denies  vigorously  that 
more  money  can  increase  business,  since  it  cannot  increase  the  number  of 
laborers,  or  of  machines,  or  the  amount  of  food,  etc.  The  doctrine  that 
Volume  of  trade  is  fixed  by  (i)  volume  of  products,  and  (2)  degree  of  speciali- 
aition  of  production,  and  hence  is  independent  of  volume  of  money,  appears 
in  Davenport,  l-koit.  of  Enterprise,  271-273. 


TRADE  AND  SPECULATION 


319 


distinction  as  I  proceed,  in  justice  to  other,  more  moderate, 
quantity  theorists. 

It  is  a  familiar  doctrine  that  the  quantity  of  money  is 
irrelevant,  that  things  go  on  in  much  the  same  way  whether 
money  is  abundant  or  scarce,  the  only  difference  being  that 
in  the  one  case  prices  are  high  and  in  the  other,  low;  that, 
in  particular,  it  is  a  gross  fallacy  to  connect  the  rate  of  in- 
terest with  the  amount  of  money,  since  (as  many  writers 
would  put  it)  the  rate  of  interest  depends  on  the  amount 
of  capital  rather  th^n  money.  At  the  opposite  extreme,  we 
have  writers  like  Brooks  Adams  (Law  of  Civilization  and 
Decay),  who  see  the  fate  of  nations  and  the  progress  of 
civilization  resting  on  the  abundance  or  scarcity  of  money. 
Fisher  takes  the  first  position  in  its  extremest  form.* 

The  truth,  I  think,  is  intermediate.  The  effects  of  the 
New  Worid  discoveries  of  gold  and  silver  after  the  voyage 
of  Columbus  on  trade  and  industry  were  tremendous. 
Trade  was  enormously  increased.    Walker,  in  his  Inter- 

» In  this  view,  Fisher  tjpifies  the  general  position  of  the  quantity  theor>', 
and,  indeed,  in  part  even  of  those  who  do  not  agree  with  the  quantity  theory] 
but  who,  with  the  quanUty  theorists,  view  tne  problems  of  money  and 
banicmg  as  matters  of  static  theory.  High  or  low  prices,  once  the  transition 
IS  made,  exhaust  the  effects  of  increasing  or  decreasing  the  money  supply. 
During  the  period  of  transition,  certain  readjustments  in  relations  between 
creditors  and  debtors  arise,  which  lead  to  either  temporary  prosperity  or 
temporary  distress,  but  after  the  transition,  it  is  a  matter  of  indifference 
whether  or  not  money  is  abundant.  Though  the  view  is,  logically,  an  es- 
sential part  of  quantity  theory  reasoning,  we  find  much  of  it  vigorously 
mamtained  by  I^ughlin,  Principles  of  Money,  ch.  on  ".\mount  of  Money 
Needed  by  a  Country."  Laughlin  and  Fisher  would  seem  to  be  at  one  in 
maintaining  that  the  quantity  of  money  in  a  country  is  a  matter  of  indif- 
ference, and  from  the  views  of  both  would  follow  a  condemnation  of  the 
idea  that  any  long  run  consequences  for  volume  of  trade,  efficiency  of  pro- 
duction, etc.,  could  follow  from  increasing  or  decreasing  the  volume  of  money. 

It  may  Ije  just  as  well  here  to  indicate  the  conviction  of  the  present  writer 
that  the  relation  between  the  quantity  theory  and  the  bimetallic  movement 
IS  historical  rather  than  logical.  Indeed,  in  laying  the  stress  they  did  on  the 
importance  of  an  inadequate  stock  of  money  in  accounting  for  the  depression 
of  the  latter  part  of  the  19th  Century,  the  bimetallists  were  out  of  harmony 
with  the  quantity  theory. 


220 


THE   VALUi:   OF  MONKY 


national  B'.mclallism,^  asking,  from  the  standpoint  of  a 
quantity  theorist,  why  j)rices  only  increased  200%  while 
money  increased  ^^o%,  admits  that  the  chief  reason  was 
the  increase  in  trade,  due  in  large  part  to  the  very  in- 
crease in  money  itself.     Sombart,  in  his  Der  Modcrne 
Kapitalismus,-  finds  in  this  influx  of  money  a  tremendous 
source  of  capitalistic  accumulations,    (a)    for   the   Con- 
quistadores,  (b)  for  the  handicraftsmen  whose  prices  rose 
faster  than  their  costs,  (c)  for  tenants  whose  rents  were 
fixed  in  money,  (d)  for  landowners,  whose  rents  were  fixed 
in  kind  [a  point  not  obviously  true],  and  (  )  for  bankers, 
as  the  Fugger.    An  increase  of  capital,  savings  that  would 
otherwise  not  have  been  made,  must  have  profoundly 
modified   the  whole  industrial   system,   and  greatly  in- 
creased both  industry  and  commerce.    If  it  be  objected 
that  effects  of  this  sort  are  not  usual,  that  they  came  in  a 
world  which  had  been  starved  for  money,  and  which,  by 
means  of  the  enormous  increase  in  money  was  able  to  pass 
from  a  "natural"  to  a  money  economy,  I  reply  that  the 
difference  between  such  a  case  and  the  usual  effects  of  an 
increase  of  money  are  in  degree  rather  than  in  kind.    The 
world  of  Columbus'  day  was  in  part  on  a  money  economy, 
and  the  worid  to-day,  despite  Professor  Fisher's  emphatic 
denial  still  employs  a  great  deal  of  barter,  or  equivalents 
of  barter.     I  shall  revert  to  this  point  later.    But  even 
this  consideration  would  not  rob  Sombart 's  points  of  their 
significance  for  modem  conditions.     Further,  we  have  an 
even  more  striking  case,  on  Walker's  own  showing,  in  the 
eflFects  of  the  Californian  and  Australian  *  gold  discoveries 
•  P.  50. 

'IV-3S8-37i,  vol.  I. 

^  Lor.  (it.,  p.  i(K3.    Cf.  our  chapter  on  " Barter." 

<  The  fact  that  prices  are  often  high  in  Kold  niininR  rcRions,  as  comparwl 
with  [)ncei  m  llie  Ktneral  worid  mari<ets,  has  Ijcen  talcen  by  many  writers 
as  pr.^)f  of  the  quantity  theor>-.  Cf.  Kemmerer,  Kfoney  and  Credit  Inslru- 
mmts,  p|).  50-51,  58;  Cairncs,  J.  i:.,  Es.ays  in  Foiitical  Economy,  parUcu- 


TRADE   AND   SPIH  ll.ATION 


331 


in   the   igth   Century  on  trade,  industry,  and   specula- 
tion.' 

Nor  is  the  tremendous  agitation  over  bimetalh'sm,  in- 
volving a  literature  so  great  that  no  man  could  dream  of 
reading  it  all,  involving  great  political  movements,  Presi- 
dential campaigns,  great  Congressional  debates,  repeated 
legislation,  international  conferences,  etc.,  for  twenty  years, 
to  be  explained  on  any  other  ground  than  that  the  world 
felt  practical,  important,  and  unpleasant  effects  on  in- 
dustry and  trade  from  the  inadequacy  of  the  money  supply. 

The  view  of  Hartley  Withers  *  is  interesting  here.  He 
says:  "any  such  great  addition  to  currency  and  credit 
would  have  a  great  effect  in  stimulating  production,  and 
so  would  lead  to  a  great  addition  to  the  number  of  real 
goods  which  humanity  desires  and  consumes  when  it  can 
get  them,  .  .  .  Trade  would  be  more  active."  On  p.  23 
he  speaks  of  the  enormous  expansion  of  trade  made  pos- 
sible by  paper  representatives  of  gold.  On  p.  83  he  speaks 
of  the  attitude  of  the  money-market  toward  gold,  which 

larly  the  discussion  of  the  Australian  episode.  It  seems  to  me  that  this  is 
particularly  inconclusive.  High  j)rices  characterize  remote  mining  regions 
of  all  kinds,  whether  gold,  silver,  coiJiier,  diamonds,  tin  or  what  not  be  the 
quest.  Prices  ;i  -e  not  lower  in  the  tin  and  copper  region  in  the  northern 
IJart  of  the  Seward  Peninsula  in  .Alaska  than  they  are  in  the  gold  region 
alx)ut  Nome  in  the  southern  part  of  that  |ieninsula.  They  are  high  in  both 
places,  not  because  of  the  abundance  of  gold  or  of  money,  but  because  of 
the  great  value  of  goods,  which  have  to  lie  i)rought  with  great  trouble  and 
cxjiense  from  the  United  States.  They  are  higher  in  the  region  of  the  Saw 
Tooth  Mountains,  in  the  centre  of  this  peninsula,  where  hydro-electric 
iwwer  for  the  use  of  the  gold  miners  about  Nome,  and  for  the  copper  and 
tin  mines  further  north,  is  being  developed,  than  they  are  at  Nome  itself, 
on  the  coast,  where  the  gold  is  being  mintxl.  They  were  high  in  .\ustralia 
because  the  discovery  of  gold  Icil  evtrylxxij-  to  abandon  everything  but 
gold  mining,  and  to  bring  in  virtually  everything  from  a  distance.  WwHlen 
beams  were  imported  to  Australia  from  Sweden!  (Pierson,  SAi.,  Principles 
»f  Economics,  I,  p.  ,^8g.)  One  would  ex|>cct  prices  in  gold  money  to  be 
higher  in  a  silver  or  <<.|>[)or  mining  region,  which  is  pr<R|K.ring,  than  in  a 
gold  mining  region,  equally  remote,  where  a  great  deal  of  gold  is  being  mined, 
but  at  a  cost  too  great  to  make  the  region  prosperous. 

'  ^(-c-  cil.,  p.  SI.  2  Meaning  of  Money,  p.  i8. 


\\ 


222 


THK  VALUE  OF  MONEY 


|! 


t 


the  orthodox  economist  is  apt  to  thinic  of  as  a  survival  of 
Mercantilism.  Withers  thinlts  that  the  money  market  is 
right  in  a  large  degree. 

As  illustrating  Withers'  statement  about  the  views  of 
"practical  men"  on  this  point,  the  following  cxtrurt  from 
a  recent  address  by  Theodore  Price,  quoted  with  approval 
in  a  "market  letter,"  written  by  Byron  W.  Holt,'  is  inter- 
esting: "The  fact  seems  to  be  that  the  exigencies  of  war 
in  Europe  are  leading  to  an  extension  of  credit  such  us 
would  not  have  been  possible  in  peace,  because  the  hesitant 
conservatism  of  bankers  would  have  then  prevented  it, 
and  we  are  finding  that  instead  of  working  harm  it  is  doing 
goo<l,  because  huge  masses  of  fixed  capital  are  thereby 
made  productive,  and  are  circulating  with  the  increased 
velocity  that  always  quickens  enterprise  and  accelerates 
the  wheels  of  industry.  ...  All  the  precedents  of  history 
indicate  that  accelerated  activity  will  come  with  peace  and 
continue  until  the  exuberance  of  success  has  led  men  to 
build  faster  than  the  world  has  grown  and  to  demand 
credit  upon  the  basis  of  future  rather  than  of  present 
values." 

WTiat  is  the  essential  causation  in  the  matter?  W^ell, 
viewed  merely  as  a  matter  of  mechanical  equilibration,  the 
quantity  theory  view  is  not  strictly  true,  by  any  means. 
For  a  given  country— and  Fisher's  quantity  theory  is 
always  a  theory  for  a  given  country,  and,  indeed,  for  any 
separate  market,  even  a  single  city  2— an  increase  of  bank- 
ing credit  means  an  increase  in  non-monetary  capital, 
because,  to  a  greater  or  less  extent  it  dispenses  with  the 
use  of  gold,  which  goes  abroad,  bringing  back  wealth  in 
other  forms  in  exchange.     Adam  Smith  saw  this  clearly, 

'  Price's  address  bcfoR  Weslern  Econ.  Aswi'ii,  Nov.  ^n,  1915;  Holt's  letter, 
Dec.  .\ 
'Loc.  cit.,  p.  172. 


TRADE   AND  SPECTn,ATIOM 


f»a 


and  phrase<l  it  strikingly,  likening  ^old  and  silver  coins  to 
the  wagon-roads  of  Scotland,  which  arc  ni-ccssary  for 
trun^l)urtat^o|,,  hm  which  none  the  less  prevent  the  use  of 
the  roadway^  for  raising  grain;  whereas  bank  .red it  is  like 
a  wagon-roi.d  through  the  air,  which  restores  the  roadbeds 
to  ulrivution.  Increased  non-monetary  capital,  other 
things  equal,  should  mean  increased  trade. 

But.   more   fundamentally,    an   increase  in  gold   itself 
within  the  rouniry,  if  not  bought  by  the  export  of  an 
equivalent  amount  of  other  goods,  is  an  iturease  of  capital. 
Not  all  capital  is  money,  but  standard  coin  is  capital. 
Money  is  a  tool  of  exchange,  and  exchange  is  part  of  the 
productive  process.     More  money  means  more  exchanging. 
That  is  what  money  is  for.    Part  of  the  mechanism  is  in 
the  money  rates,  which  go  down  as  money  becomes  more 
abundant,  making  it  profitable  to  effect  exchanges  which 
would  not  have  been  profitable  had  the  money  rates  been 
higher.     Granted  that  the  money-rates  and  the  general 
rate  of  interest  tend,  in  the  long  run,  to  keep— I  will  not 
say  at  the  same  figure  '—a  certain  fairly  definite  relation 
to  one  another,  it  still  does  not  follow  that  the  new  "nor- 
mal" equilibrium  will  give  us  an  interest  rate  which  is  the 
same  as  the  general  rate  of  interest  was  before  the  influx  of 
gold.    On  the  strictest  static  theory,  this  is  not  to  be  ex- 
pected.    Because  the  total  amount  of  capital  in  the  coun- 
try is  increased,  and  this  means  a  lowered  interest  rate  all 
around,    in   the   marginal   emplo>'ment   of  capital.     The 
margin  of  the  use  of  capital  will  l>e  lowered  everywhere,  in- 
cluding the  margin  for  the  use  of  money.    This  means 
permanently  lowered  money  rates  in  the  country,  even 
though  the  permanent  level  be  higher  than  the  initial 

'See  our  discussion  of  "money  rates"  and  "interest  rates,"  supra,  in 
the  chaptii  on  "Capitalizati..!!,'  and  infra,  in  the  chapters  on  "The  Func- 
tions of  Money,"  and  on  "Credit." 


I  i 


f 


■'■'4  THE   VAT.Ut:   of  MONTY 

money  rates  immediately  following  the  access  of  new  gold. 
I  ha\e  put  the  argument  in  terms  that  suggest  the  pro- 
ductivity theory  of  interest,   because  it  is  more  simply 
stated  that  way.     I  do  not  accept  the  productivity  theory, 
as  a  fundamental  explanation  of  interest,  but  for  many 
purposes,  the  results  to  be  obtained  by  it  coincide  with  the 
psychological  time  theories,— which  also,  in  their  present 
form,  seem  tt)  me  imperfectly  developed.     I  need  not  try 
to  construct  a  theory  of  interest  here,  however,  as  the 
familiar  theories  lead  to  no  trouble  at  this  point.     It  is 
enough  to  point  out  that  the  increased  amount  of  capital, 
meaning  better  provision  for  present  wants— wants  con- 
cerned with  gold  in  the  arts  and  with  money  for  productive 
exchanges,  as  well  as  goo<ls  generally  since  part  of  the  new 
gold  will  be  exported  for  other  things     will  lessen  the  pres- 
sure of  present  as  compared  with  future  wants,  and  so 
lessen  the  rate  of  interest  on  the  time-preference  theory. 
The  tlnal  outcome  will  be  an  extension  of  the  marginal  use 
of  money,  and  a  greater  volume  of  exchanges.     Of  course, 
the  increase  in  the  supply  of  any  kind  of  capital  good,  apart 
from  a  prior  increase  in  the  demand  for  its  services,  will, 
on  the  mechanical  vie.v  of  economic  causation,  necessarily 
lead  to  some  fall  in  its  capital  value.     Gold  money  will  be 
no  exception  to  this  rule.     As  to  how  much  the  increase 
in  its  quantity  will  lead  its  capital  value  to  fall,  however, 
we  are  unable  to  say.     For  the  quantity  theory,  the  fall  will 
Ix'  in  proportion  to  the  increase.     For  the  theory  just  out- 
lined, the  fall  will  depend  on  the  elasticity  of  demand  for 
gold  in  the  arts,  and  on  the  elasticity  of  "demand"  for 
money,  meaning  by  demand  for  money  simply  the  demand 
for  the  short-time  use  of  money  as  a  tool  of  exchange,  a  de- 
manil   which  governs  directly,   not   the  capital  value  of 
money,  but  rather  the  "money-rates."    The  relation  be- 
tween the  money  rates  and  the  capital  value  of  money  will 


TRADE  AND  SPECULATION 


225 


best  be  discussed  at  another  point.'  We  have  no  reason 
at  all  to  suppose  that  either  of  these  demands  ■  exhibits 
the  tendency  to  obey  the  law  of  proportional  variation 
which  the  quantity  theory  requires  of  money. 

It  is  further  important  to  note  that  as  a  country  gets 
more  abundant  capital,  there  seems  to  be  a  tendency  to 
extend  the  use  of  money  rather  more  than  the  use  of 
many  other  capital  goods.  Where  the  interest  rate  is  lo 
and  12%,  as  in  Arizona  and  New  Me.xico,  money,  even 
when  brought  in,  tends  to  leave  in  large  degree  to  bring 
in  other  forms  of  capital  which  the  situation  calls  for 
more  imperatively.  The  early  American  colonies,  needing 
money  pressingly,  and  making  shift  with  a  great  variety 
of  substitutes  for  good  metallic  money,  thoroughly  ac- 
quainted with  the  advantages  of  a  money-economy  from 
their  European  experience,  -rnd  having  "habits"  as  to  the 
carrying  and  using  of  mont.  .vhich  they  had  brought  with 
them  from  Europe,  still  found  it  impossible  to  keep  a  great 
deal  of  metallic  money,  in  view  of  the  still  greater  impor- 
tance of  other  forms  of  capital.  It  is  in  the  most  highly 
developed  commercial  communities,  commercial  centres, 
and  par  excellence,  in  the  speculative  centres,  that  the  {le- 
mand  for  the  money-service  is  most  elastic'  A  country 
where  the  rate  of  interest  is  low,  lo-ses  other  forms  of  capital, 
and  gains  money,  in  the  process  of  reequilibration,  as  com- 
pared with  a  new  and  undeveloped  section,  although  the 
new  section  also  extends  the  margin  of  the  money  service, 
in  effecting  a  greater  number  of  exchanges,  when  money  is 
increased. 

And  this  leads  to  a  vital  distinction,  which  quantity  theo- 
rists abnost  always  lose:  the  distinction  between  the  volume 

^  Infra,  chapter  on  "Functions  i)f  .Money,"  ;inil  supra,  chapters  on  "Cap- 
itali7.ati(m  "  and  "  D<Kli)-Boncs." 

'  L'f.  our  l:haplef^  on  "  Supply  and  Demand,'  and  '  The  OriRin  of  Money." 
'  New  York  City  can  always  use  idle  funds,  "at  a  price." 


226 


THE   VALUE  OF  MONEY 


!! 


of  production,  and  the  volume  of  trade.  Even  in  the  mechan- 
ical system  of  causation  which  they  describe,  it  is  true  only 
of  production  and  transportation  that  technical  and  physi- 
cal '  factors  are  of  primary  significance,  and  that  money 
is  of  minor  significance.  For  trade  and  commerce,  money 
is  always  highly  important.  To  the  extent  that  a  region 
is  primarily  given  over  to  the  primary  productive  activ- 
ities, mining,  and  agriculture,  such  trading  as  is  necessary 
can  be  done  by  means  of  a  small  amount  of  money,  supple- 
mented by  barter  and  long-time  book-credit.  A  region 
or  a  city  whose  chief  business  is  commerce,  however,  needs 
a  large  part  of  its  capital  in  the  form  of  money,  and  of 
banking  capital,  which  is  largely  invested  in  money  for 
banking  reserves.  Trade,  as  distinguished  from  industry 
(and  it  is  after  all  trade  that  is  under  discussion),  is  helped 
or  hindered  as  its  tools  are  more  or  less  abundant.  These 
considerations  would  suggest  that  the  elasticity  of  the  de- 
mand for  the  use  of  money  is  greater  than  the  elasticity  of 
demand  for  the  use  of  capital  in  almost  any  other  form. 
Production  is,  indeed,  limited  by  labor  supply  and  natural 
resources,  in  considerable  degree.  Trade,'^  however,  even 
from  the  standpoint  of  mechanical  causation,  is  limited 
chiefly  by  the  relation  between  the  profits  to  be  made  in 
commercial  transactions,  and  the  "price"  that  must  be 
paid  for  the  money  and  credit  that  are  required  to  put 
them  through.  There  are  enormous  numbers  of  transfers 
that  could  be  made  to  advantage  if  there  were  no  cost  at  all 
involved.  They  are  not  made,  because  exchanging  re- 
quires pecuniary  capital.    Let  the  pecuniary  capital  in- 

'  KtmmcriT,  as  well  as  I'ishcr.  allows  physical  |)rcKiiiction  and  consum|)- 
tion  to  dominate  his  "index"  of  trade  variallun.  Loc.  til.,  pp.  130-iji; 
I-'isher,  Inc.  cit.,  p.  470.    ('/•  our  disiussion  of  their  statistics,  infra. 

'This  confusion  of  volume  of  trade  and  volume  of  production  is  a  com- 
panion of  the  confusion  discusse.;  on  p.  307,  infra,  of  quantity  of  money 
with  \oiume  of  mone> -//« owi-.  Tlie  two  confusions,  found  in  virtually  itll 
c.\|)ositions  of  the  quantity  theory,  give  it  most  of  its  plausibility. 


TRADE  AND  SPECUT.ATION 


227 


crease,  however,  and  sub-marginal  exchanges  become 
worth  while,  the  general  margin  is  lowered.  Commerce 
is  the  most  highly  flexible  and  elastic  portion  of  the  whole 
productive  process.  The  elasticity  of  demand  for  com- 
mercial capital  is,  thus,  greater  than  the  elasticity  of  de- 
mand for  any  other  form  of  capital. 

How  widely  the  volume  of  trade  differs  from  the  volume 
of  production,  and  how  great  is  the  element  of  speculative 
transactions  in  trade,  will  best  appear,  I  think,  from  an 
analysis  of  the  figures  which  Fisher  gives  ^  for  the  volume 
of  trade  in  the  United  States.    His  figure  for  the  volume 
of   trade   in  the  year  1909  is  $387,000,000,000.00,  three 
hundred  and  eighty-seven  billions  of  dollars!    This  figure 
is  reached  by  equating  the  figures  he  has  reached  for  MV 
plus  M'V  to  PT,  and  assuming  P  to  be  one  dollar,  by 
making  the  "unit"  of  T,  arbitrarily,  a  dollar's  worth  of 
each  sort  of  commodity,  at  the  prices  of  1909.    I  have 
already  commented  on  the  legitimacy  of  this  method  of 
summarizing  T,^  and  netxi  not  say  more  here,  beyond 
calling  attention  to  the  fact  that  "volume  of  trade,"  as 
commonly  used,  does  in  fact  mean,  not  T  alone,  but  PT. 
Fisher  for  years  other  than  1909,  however,  makes  use  of  a 
different  method  of  getting  at  T:  he  takes  certain  indicia 
of  relative  amounts  of  trade,  compares  them  with  the  same 
indicia  for  1909,  and  estimates  the  trade  for  other  years  as 
being  such  a  percentage  of  the  trade  for  1909  as  their  indicia 
are  of  the  indicia  of  1 909.    The  indicia  chosen  are :( i )  quan- 
tities of  certain  commodities,  cotton,  fruit,  cattle,  etc.,  re- 
ceived at  principal  cities  of  the  United  States,  taken  as 
typical  of  the  variations  of  the  internal  commerce  of  the 
United  States;  (2)  quantities  of  23  articles  of  import  and  25 
articles  of  export,  for  each  year,  taken  as  typical  of  varia- 

'  Loc.  cit.,  ch.  12,  and  ap{H:n(!ix  to  ch.  12. 
'  Supra,  ch.  on  "  Equation  of  Kxchange." 


H 


m 


228 


THE   \'ALUF.   OF   MONEY 


tions  in  the  foreign  trade  of  the  United  States;  (3)  sales  of 
stocks.    These  three  indicia,  weighted  in  a  manner  to  be 
(k'scribed  in  a  moment,  are  then  averaged.     There  is  a 
second  element  in  the  index,  made  up  by  taking  the  figure's 
for  railroad  lonmigc,  and  the  figures  for  receipts  on  first  class 
mail  which  are  averaged.    The  first  average  and  the  sec- 
ond average  are  then  combined  into  a  third  average,  which 
is  the  final  index.    The  relation  between  this  index  for  every 
year  other  than  1909  and  the  same  index  for  the  year  1909 
determines  the  amount  of  T  for  each  year— the  t%/o  indicia, 
together  with  the  figure,  $387.ooo,ooo,cxx).oo,  giving  the 
required  amount  by  the  "rule  of  three."    I  shall  not  go 
into  details  with  the  method  of  constructing  these  averages, 
but  I  wish  to  make  clear  the  comparative  weight  given  to 
each  element  in  the  final  index:  The  fir^l  three  elements  count 
td'icc  as  heavily  as  the  last  two,  and  so  constitute  the  biggest 
factor.    In  the  first  average,  based  on  the  first  three  ele- 
ments, the  item  taken  as  t^-pical  of  internal  trade  is  weighted 
by  2(\  the  item  taken  as  typical  of  foreign  trade  is  weighted 
by  ?,  and  sale  of  stocks  by  i.    It  appears  from  Fisher's 
figure    (p.  479),  that  the  one  really  big  variable  among  all 
the  indicia  is  the  sale  of  stocks,  but  the  weight  given  it  is 
so  small  that  it  makes  virtually  no  difference  in  the  final 
result.     Thus,  as  between  1898  and  1899,  stock  sales  in- 
creased over  50';  c,  but  total  trade,  as  shown  by  Fisher, 
increased  only  5%.    In  the  following  year,  stock  sales  de- 
creased over  21';;,  but  total  trade,  on  Fisher's  figures,  in- 
creased.   The  following  year,   1901,  stock  sales  virtually 
doubled,  but  Fisher's  final  figure  shows  only  an  increase 
around  if/c-    Two  years  later,  in  1903,  stock  sales  fell  off 
about  4o';o.  from  the  figures  for  1901,  but  again,  as  com- 
pared with  1 901,  total  trade  on  Fisher's  figures  shows  an 
appreciable  gain.     The  influence  of  stork  sales  on  Fisher's 
index  is,  virtually,  negligible.    The  dominating  factor  is  the 


TRADE  AND  SPErm.ATIOX 


3^0 


receipts  of  selected  staples,  cattle,  cotton,  rice,  pig  iron,  etc., 
in  the  principal  cities  of  the  United  States.  There  is  not  a 
.sini^lr  year  in  which  his  final  figure  for  'I'  does  not  mo\  c  in 
liamiony  with  this  factor  (p.  479).  He  gets,  thus,  for  the 
volume  of  trade  through  the  fourteen  years  under  consid- 
eration, a  surprising  steadiness,  and  a  pretty  uniform  pro- 
gr     ive  development. 

In  defence  '  of  his  method  of  weighting,  Fisher  says, 
simply:  "These  weights  are,  of  course,  merely  matters  of 
opinion,  but,  as  is  well  known,  wide  dijfcrences  in  systems 
of  weighting  make  only  slight  dijfcrences  in  tlie  final  aver- 
ages.'' (Italics  mine.)  2 

Are  these  figures  valid?  Well,  first  one  is  struck  with 
the  absolute  magnitude  assigned  to  T.  The  figures  seem 
vastly  greater  than  would  have  been  anticipated.  The 
method  of  calculating  it,  for  1909,  I  shall  discuss  in  detail 
in  the  chapter  on  "Statistical  Demonstrations  of  the 
Quantity  Theory."  For  the  present,  it  is  enough  to  note 
that  the  absolute  magnitude  is  derived  from  figures  col- 

'  In  a  letter  to  the  writer,  Professor  Fisher  states  that  the  figures  for  the 
physical  receipts  at  the  cities,  which  dominate  his  index  for  T,  have  not 
been  available  'or  recent  years,  and  that  since  they  were  discontinued,  he 
has  rehed  chiefly  on  the  indirect  calculation  of  T  via  the  other  factors  in 
the  equation.  These  figures  were  discontinued  in  1912.  fn  the  American 
liconomic  Rccin.'  for  June,  1916  (p.  457,  n.)  Professor  Fisher  states  that 
the  indirect  calculation  of  T  has  always  had  more  weight  in  his  figures  than 
the  direct  calculation.  This  would  serve  in  some  degree  to  lessen  the  errors 
of  his  index  of  variation.  The  extent  to  which  he  has  allowed  his  T  as  di- 
rectly calculated  on  the  basis  of  the  index  to  lie  m.Klilied  l)y  the  indirect 
calculation,  is  indicated  on  p.  302  of  the  Purchasing  Power  of  Moiirv,  as 
follows:  "The  alterations  in  T,  as  sho.vn  in  Figure  16,  though  still  greater 
than  the  preceding,  are  nevertheless  so  small  and  vitiform  as  to  prescr\e 
an  almost  perfect  parallelism  between  the  original  the  altered  curve. 

The  differences  rarely  exceed  10%."  Even  an  indirect  calculation  of 
T,  however,  would  not  avoid  the  criticisms  here  urged,  since  the  other 
fa(  tors,  MV,  M'V,  and  P  are  all,  as  we  shall  see  in  the  chapter  on  ".Statis- 
tical .)emonstrations  of  the  Quantity  Theory,"  cafculated  by  methods 
which  give  very  excessive  weight  to  trade  outside  Xew  York  City  .ind  to 
n<»n-s|)eculative  transactions. 

*Loc.  cU.,  J).  485. 


230 


THE  VALUE  OF  MONEY 


lected  by  Dean  David  Kinley  for  the  National  Monetary 
Commission,'  of  deposits,  exclusive  of  deposits  made  by 
one  bank  in  another,  made  in  about  12,000  banks  (out  of 
25,000)  on  March  16,  1909.  These  deposits  were  classified 
as  (0  money  (with  subdivisions)  and  (2)  checks  and  other 
credit  instruments.  A  cross-classilication  divided  them  into 
(i)  retail  deposits;  (2)  wholesale  deposits;  (3)  all  other 
deposits.  Kinley 's  object  was  to  determine  the  extent 
to  which  checks  are  used,  as  compared  with  money,  in  pay- 
ments, particularly  in  wholesale  and  retail  business.  Fisher's 
total,  briefly,  was  obtained  as  follows:  Kinley 's  figures,  for 
the  one  day,  were  increased  to  make  an  allowance  for  the 
non-reporting  banks;  they  were  further  increased  on  the 
assumption  that  March  16  was  below  the  average  for  the 
year;  the  figure  finally  obtained  for  the  day  was  then  mul- 
tiplied by  303,  assumed  as  the  number  of  banking  days  in 
the  year,  and  the  product,  399  billions,  was  taken  as  repre- 
senting the  total  circulation  of  money  and  checks  in  trade. 
For  some  reason  not  made  clear,  this  total  was  subsequently 
reduced  to  387  billions.  Counting  the  average  price,  P, 
as  Si,  T  was  considered  to  be  387  billions.* 

In  the  statistical  chapter  to  follow,  it  will  be  shown  that 
this  estimate  is  a  very  decided  exaggeration.  Deposits 
made  in  banks  greatly  overcount  trade.  Very  many  pay- 
ments represent  duplications,  loans  and  repayments,  taxes, 
etc.,  and  are  in  no  sense  trade.  This  is  true  of  all  classes 
of  deposits,  wholesale  and  retail,  as  well  as  "all  other." 

'  The  Use  of  Credit  Instruments  in  Payments,  Senate  Document  No.  399, 
6 1  St  Congress,  2nd  Session. 

*  This  brief  account  will  be  amplified  for  critical  discussion  in  the  statis- 
tical chapter  below.  Fisher  in  fact  calculated  MV  and  M'V  separately. 
The  account  above  given  is  strictly  accurate  only  for  that  part  of  T,  353 
billions,  which  is  carried  on  by  means  of  checks.  The  calculation  of  MV, 
however,  is  also  based  on  Kinley's  figures.  My  account  here  is  adequate 
for  the  cjucstiDn  at  issue,  which  is,  not  as  to  the  absolute  magnitude  of  trade, 
but  rather,  as  to  the  proportions  of  speculation  and  other  elements  in  trade. 


TRADE  A\D   SPECULATION 


23« 


But  for  the  present,  I  am  concerned  with  the  question,  not  of 
the  absolute  magnitude  of  the  volume  of  trade,  but  rather, 
the  questions  of  its  character,  of  the  elements  that  enter  into 
it,  and,  above  all,  of  the  extent  to  which  it  is  physically  de- 
termined by  technical  conditions  of  production,  and  the  ex- 
tent to  which  it  is  flexible,  a  matter  of  speculation,  etc. 

We  may  approach  this  question  from  the  angle  of  several 
bodies  of  statistical  information.  First ,  the  question  may  be 
raised:  what  is  there  in  the  country  which  could  be  bought 
and  sold  enough  in  the  course  of  a  year  to  give  us  anything 
like  so  great  a  total?  The  subtractions  which  we  shall  find 
it  necessary  to  make  will  still  leave  us  an  enormous  total. 

The  United  States  Census  Bureau  '  in  1904  reached  the 
conclusion  that  the  total  wealth  of  the  country  was  only 
$107,000,000,000.  Of  this,  over  $62,000,000,000  was  in 
real  estate;  $11,000,000,000  in  railroads;  street  railways, 
over  $2,000,000,000;  telephone,  telegraph,  water  and  light, 
and  similar  enterprises  total  nearly  $3,000,000,000  more. 
None  of  these  things  enter  into  ordinary  wholesale  and  re- 
tail trade.  The  items  that  one  would  ordinarily  think  of 
are  agricultural  products,  $1,900,000,000;  manufactured 
products,  $7,400,000,000;  mining  products,  $400,000,000. 
Can  these  things  be  exchanged  often  enough  in  the  course 
of  a  year  to  account  for  $387,000,000,000! 

These  figures  are  for  1904,^  whereas  Fisher's  figures  are 

'  The  substance  of  the  argument  here  presented  first  appeared  in  articles 
in  the  A  nncdist,  to  which  I  am  indebted  for  permission  to  use  it  here.  See 
the  numbers  of  Feb.  7,  March  6,  and  March  20,  iqi6.  Professor  Fisher's 
replies,  directed  wholly  against  the  charge  of  double  counting,  appcarwl 
in  the  Annalist  of  Feb.  21  and  March  13,  1916.  Professor  Fisher  does  not 
question  my  contention  that  s|)eculation  makes  up  the  overwhelming  bulk 
of  trade,  in  these  replies.  He  rather  seeks  to  meet  the  charge  of  overcounting 
by  holding  that  bank-transactions  do  not  fully  count  siieculation !  This  he 
thinks  particularly  true  of  stock  exchange  transactions.  Cf.  his  article  of 
Feb.  21,  1916. 

•  The  Census  Bureau  figures  have  been  subject  to  a  good  deal  of  criticism, 
and  I  therefore  refrain  from  trying  to  draw  precise  conclusions  from  them. 


2.5  2  THE   VALUE   OF   MONEY 

for  iqck;.  If  the  Census  Bureau  had  taken  an  inventory 
in  1909,  the  figures  would  doubtless  be  larger.  The  in- 
ventory for  1912  made  by  the  Census  Bureau  does  show  a 
very  considerable  increase,  the  largest  item  being  due  to  a 
rise  in  real  estate  values.  The  figures  for  agricultural, 
manufacturing,  and  mining  products  are,  also,  figures  for  a 
given  time  rather  than  for  total  production  through  the 
year.  But,  making  all  the  allowance  one  pleases,  it  is 
quite  incredible  that  one  should  reach  a  figure  of  $387,000,- 
000,000  by  taking  only  the  exchanges  necessary  to  bring 
raw  materials  through  the  various  stages  of  production 
to  the  consumer.  The  greater  part  of  the  $387,000,000,000 
is  to  be  explained  in  another  way! 

A  detailed  analysis  of  Kinley's  figures,  on  which  the 
estimate  of  total  trade  is  based,  leads  clearly  to  the  same 
conclusion.  Kinley's  figures  for  the  banks  that  reported 
on  March  16,  1909,  are  as  follows: 

Retail  dtposits 60  millions 

Wholesale  deposits ^4  millions 

"-■Ml  other"  deposits 502  millions 

The  "all  other  deposits"  are  vastly  greater  than  retail 
and  wholesale  deposits  combined!  Notice,  too,  with 
reference  to  the  question  as  to  how  often  goods  need  to  be 
turned  over  in  getting  to  he  consumer:  wholesale  trade 
uses  only  about  twice  as  much  money  and  checks  as  does 
retail  trade.  Goods  are  not,  if  these  figures  are  in  any  way 
typical  of  actual  •  trade,  turned  over  many  times  in  the 
process  of  reaching  the  consumer.  The  "necessary,"  or 
"physically  determined"  number  of  exchanges,  in  the 
routine  of  trade,  is  small,  per  item. 

Retail  deposits  of  60  millions  make  up  less  than  one- 
eleventh  of  the  total.  Retail  and  wholesale  deposits  together 
make  up  about  three-elevenths.     What  is  the  other  eight- 


TRADE  AND  SPKm.ATION 


233 


elevenths,  represented  by  the  "all  other  deposits"?  It 
will  helj)  if  we  see  where  these  "all  other"  deposits  are 
located.  If  we  find  them  scattered  evenly  throughout 
the  country,  in  rural  regions  as  well  as  in  cities,  we  might 
be  at  a  loss.  If,  however,  we  find  them  bunched  in  the  big 
speculative  centres,  we  may  conclude  that  speculation 
accounts  for  a  large  part  of  them.  We  do  in  fact  find  this. 
The  following  figures  show  the  difierent  classes  of  de- 
posits (i)  in  the  South  Atlantic  States;  (2)  in  reserve  cities; 
(3)  in  New  York  City  alone: 

South  Atlaulic  States:  Pcr  Cent. 

Retail  deposits $    3,300,000 ig.o 

Wholesale  deposits 4,900,000 29.0 

"All  other"  deposits 8,qoo,ooo 52.0 

Reserve  Cities  {iiieluding  New  York  City): 

Retail  deposits $  24,000,000 5.6 

Wholesale  deposits 78,000,000 18.2 

"All  other"  deposits 326,000,000 76.1 

New  York  City: 

Retail  deposits 0,000,000 3.7 

Wholesale  deposits 34,000,000 14.0 

"All  other"  deposits 198,000,000 82.2 

It  is  difficult,  with  Kinley's  figures,  to  get  figures  which 
exclude  returns  from  cities  of  substantial  size,  except  for  a 
State  like  Nevada,  where  the  mining  and  divorce  industries 
complicate  the  figures.  As  near  an  approach  as  can  be 
n>,.de,  perhaps,  is  to  take  the  State  of  Louisiana,  excluding 
New  Orleans  from  the  totals.  Even  here,  however,  we 
include  five  cities  of  over  ten  thousand,  among  them 
Shrevesport,  with  28,000  people.  The  following  figures 
are  for  the  State  and  national  banks  m  Louisiana  exclusive 
of  New  Orleans: 

Retail  deposits $179,0x5, 24.1 

Wholesale  deposits 246,647 33.1 

"All  other"  deposits 318,915 42.8 


*'""'* 

^H 

234 


THE  VALUE  OF  MONEY 


We  cannot  tell,  in  these  figures  for  Louisiana,  how  many 
hanks  are  represented,  or  what  the  average  figures  per 
bank  arc.  For  the  whole  State  of  Arkansas,  however,  in- 
clu(hng  five  cities  of  over  lo.ooo,  with  two  over  20,cxx).  and 
one  of  45,cxx5,  we  can  get  an  average  for  ninety  reporting 
banks.  Even  here  we  do  not  know  where  these  banks  are 
located  within  the  State,  though  it  is  probable  that  they 
are  in  the  larger  places,  and  .so  exceed  the  average  deposits 
for  the  banks  in  the  State  as  a  whole,  to  say  nothing  of  the 
average  for  the  smaller  jilaces.  The  ninety  banks  are 
almost  wholly  State  and  national  banks. 

Arkansas:  Pf^  Cent. 

Retail  dt-posits $2^2,017 25  + 

WhoKsiile  deposits 2.^1,614 2%  + 

".Ml  other"  deposits 456,544 49  + 

The  average  for  all  deposits,  per  bank,  in  Arkansas  is 
$10,224;  the  average  for  all  the  11,492  banks  reporting  for 
the  whole  country  is,  approximately,  $60,000;  the  average 
for  the  659  banks  reporting  from  New  York  State  is  $502,- 
136;  the  average  for  the  banks  in  New  York  City  alone 
is  doubtless  much  higher,  but  cannot  be  stated,  as  Kinley's 
figures  do  not  tell  how  many  banks  reported  by  cities.' 

The  "all  other  deposits"  in  Arkansas  are  27.8%  cash, 
and  72.2%  checks;  the  "all  other"  deposits  in  the  country 
as  a  whole  are  only  4.1^;  cash,  with  95.9%  checks;  the  "all 
other  deposits"  of  New  York  City  are  only  i%  cash,  with 
98.9%  checks. 

Several  facts  are  very  clear  from  these  comparisons:  (i) 
the  proportion  of  "all  other  deposits"  increases  very 
rapidly  as  we  get  closer  to  the  great  centres  of  speculation, 

'  The  fiRures  showinK  the  number  of  banks  re|)orting  from  each  State, 
together  with  the  numtxjr  of  reports  rejected,  will  Ije  found  on  pp.  47-49  of 
his  inonoeraph.  The  fisures  .iliovo  .-.n-  combinations  of  figures  from  his 
vanous  tables.  These  tables  arc  so  carefully  indexed  in  Dean  Kinley's 
monograph  that  detailed  page  references  are  unnecessary  here. 


TRADE  AMD  SPECULA.. ON 


335 


and  is  lowest  in  rural  regions;  (2)  the  great  bulk  of  all  the 
deposits  is  in  the  cities.    The  average  for  Arkansas  banks, 
for  exa-'-ple,  is  only  one-sixth  the  average  of  the  whole 
country,  and  is  only  one-fiftieth  the  average  for  the  banks 
of  New  York  State.    It  is  a  much  smaller  fraction  of  the 
average  for  New  York  City,  but  wc  cannot  give  an  exact 
figure.    The  totals  reiwrtefJ  from  the  rural  regions  are 
trifling,  as  compared  with  the  totals  re},  rted  from  the  big 
cities.    This,  as  will  be  made  clear  in  the  chapter  on  "Sta- 
tistical Demonstrations  of  the  Quantity  Theor>-,"  is  not 
because  the  country  reports  wi  -e  less  complete  that  the 
city  reports.    New  York  was  probably  less  complete  than 
the  country  as  a  whole.    It  is  simply  because  the  activity 
of  country  accounts  is  small,  the  amount  of  trading  in  the 
country  districts  small,  and  (as  shown)  the  average  for 
country  banks  is  smaU.     (3)  The  character  of  the  "all 
other"  deposits  in  Arkansas  differs  substantially  from  that 
of  the  "all  other"  deposits  in  New  York  City,  as  indicated 
by  the  fact  that  the  proporUon  of  cash  is  high  in  Arkansas 
—substantially  higher,  in  fact,  for  the  "all  other"  deposits 
in  Arkansas  than  for  all  deposits,  or  even  for  retail  deposits, 
in  the  country  as  a  whole.    The  percentage  of  checks  in 
total  retail  deposits  in  the  United  States,  in  Kinley's 
figures,  was  73.2;  the  percentage  of  checks  in  the  "all  other" 
deposits  in  Arkansas  was  72.2.    We  may  count   these 
Arkansas  "all  other"  deposits  as,  in  considerable  degree, 
deposits  made  by  farmers.    What  were  the  "all  other  de^ 
posits"  made  in  New  York  City? 

Dean  Kinley's  list  of  the  miscellaneous  elements  that 
enter  into  the  "all  other  deposits,"  given  on  p.  151,  con- 
tains only  two  that  might  be  expected  to  bulk  large  in  New 
York  without  appearing  in  Arkansas.  These  are:  brokers, 
and  stock  and  bond  financial  corporations.  Of  course, 
theatres,  hotels,  publishing  houses,  raib-oads,  public  fundsi 


-'.i^' 


IHi:   VALUK   OF  MONKY 


I 


li 


iii 


II I 


"tl«)sc  who  have  no  siwcifu:  business,"  and  rich  churches, 
will  all  be  absolutely  much  larger  in  New  York  City  than  in 
Arkansas.  But  these  things  may  be  found  in  many  places, 
scattered  throughout  the  cities  of  the  countr> .  without 
making  anything  like  such  "all  other"  deposit.-  .is  .\ew 
\'ork  shows.  It  is  not  \ew  York's  foreign  commerce 
that  does  it.  Iwcause  that  is  represented  in  New  Y'ork's 
"wholesale  de|>osits,"  which  make  up  only  14%  o*  .\cw 
York  City's  total  deposits  for  the  day.  It  cannot  hv  the 
supi)osed  "clearing  house"  function  of  New  York  Tity.' 
whereby  banks  in  dilTerent  parts  of  the  countr  pay 
their  balances  due  one  another  in  New  York  exchance.  lie- 
cause  such  transactions  would  appear  in  New  York  hietly 
in  the  figures  for  (leiK)sits  made  by  one  bank  in  another,  aaid 
these  figures  are  e.xclu«led  from  Kinley's  totals.  It  cannot 
be  the  deiM)sits  of  the  "idle  rich"  for  current  expenses  tJaat 
swell  New  York's  "all  other  deposits"  so  greatl> — tbnie 
could  not  equal  the  total  retail  deposits  of  the  city,  wiiKh 
are  only  ^.f'c  "f  the  total  in  New  York.  Moreo\er,  saft- 
ilar  deposits  are  made  in  many  other  cities,  witliout.  in 
proportion  to  population,  making  any  such  totals.  Fig- 
ures, moreover,  for  the  aggregate  yearly  income  of  tbe 
United  States,  and  for  the  distribution  of  that  income  h*'- 
tween  rich  and  iK)or,  make  it  clear  that  any  such  items  must 
be  bagatelles  in  comparison  with  these  enormous  figures. 
The  only  explanation  that  will  really  explain  is  the  specula- 
tive and  investment  and  financial  tran.sactions  that  centre 
in  New  York,  and,  in  less  degree,  in  the  other  great  fman- 
cial  titles  of  the  country. 

This  is  Dean  Kinky 's  opinion.     In  the  "all  other"  de- 
posits he  makes  ;i  50','  allowance  for  speculative  transac- 
tions.   ".\  large  jm)portion  of  deposits  in  this  'all  others' 
class  undoubtedly  represents  si)eculative  transactions,  alJ 
'  cy.  our  discussion  of  this  topic  in  the  statistical  chapter,  infra. 


TRAUK  AND  SPECULATION 


2.17 


of  whi<  h,  <»r  pnu  tiially  all  of  which,  arc  settled  with  credit 
paper."  '  It  In  also  the  opinion  of  (Jeneral  Francis  A. 
Walker,  expressed  concerning  similar  figures  from  earlier 
inquiries.-' 

\arious  kinds  of  evidence  converge  toward  this  con- 
clusion.    Thus,  the  evidence  of  clearings,  total  items  pre- 
sented by  hanks  to  the  clearing  houses  of  the  countr^•. 
New  York  clearings  are  usually  nearly  twice  as  great  as 
total  clearings  for   the  rest  of  the  country.     New  York 
clearings  lluctuate  in  general  harmon)   with  transactions 
on  the  New  York  Stock  Exchange.     This  has  been  com- 
mented on  many  times.     The  extent  to  which  it  holds 
has  recently  Ix-en  carefully  measured  by  Mr.  N.  J.  Silber- 
lirig.  whose  results  appear  in  the  Antuilisl  for  August  14, 
ic;i6.  under  the  title,  "The  Mystery  of  Clearings."    Mr. 
Silberling  apjjjies  the  "coeflicient  of  correlation"  to  the 
problem,  getting  in  one  signiticant  figure  a  measure  of  the 
extent  to  which  two  variables,  as  share  sales  on  the  New 
York  Stock  Exchange  and  New  \'ork  clearings,  var\'  to- 
gether.   This  coefficient  has  been  used  enough  by  econ- 
omists not  to  require  detailed  explanation  here.     It  is  a 
figure  always  l)etween  +  i  and     - 1.     4-1  indicates  that 
the   two  variables  in  question  are  perfectly  correlated, 
whereas  o  indicates  no  correlation  whatever.     —  i  indi- 
cates an  inverse  correlation,  such  that  two  variables  vary 
exactly  and  inversely  with  reference  to  one  another.^ 

'  '■"(   "■'-  pp.  IS.?-1S4 

'  Discussions  in  Fjcoiwmiis  and  Slati stirs,  1,  204.    Quotwl  by  Kinley,  lo(. 

til.,   I  ^J. 

'  The  c«»L-rtk ient  u(  lurrtlalion  lia*  liet-n  (lev elopctl  tiy  the  hioIoRists,  chiefly 
K;ir!  IVurson,  hut  hii-.  \wfu  a|>|>lkii  i<.  i.nihk-ni-.  in  many  tiflds,  es|)e':ially 
f.  imorniis,  siMUiIotry.  psvt  holou'v,  ami  cducatHiii.  A  jjtMMl  source  is  Yule's 
hiirodititiim  lo  III,-  iliivry  of  Sttili<;ii,s.  VToh-><*tr  II.  L.  M.K.re  has  made 
e.\teiisi\e  use  of  tlie  methwl  in  his  Luns  of  Wuars,  and  his  liionomic  Cycles. 

vufincctcti  witn  ;,~c  c«iciliciciil  of  Luiicutliun,  usually,  is  a  figure  for 
"probable  error,"  which  de|)ends,  primarily. on  the  square  root  of  the  num- 
ber of  observations.   When  the  probable  error  ir  low,  and  the  coefficient  of 


238 


THE  VALUE  OF  MONEY 


*1. 


Mr  Silbcrli'ng's  studies  show  the  following  correlations: 
New  York  share  salts  (numbers  of  shares,  not  values)  to 
New  York  clearings,  using  weekly  figures,  for  the  years 
i9C<)-io,  r  =  .628.  This  is  a  high  correlation.  Limiting 
the  obser\ations  to  the  middle  weeks  of  the  month  for  the 
same  period,  he  gets  r  =  .731(46).  The  reason  for  taking 
only  middle  weeks  in  the  month  is  that  thereby  the  dis- 
turbing factor  of  monthly  settlements  is  avoided.  The 
monthly  settlements  may  be  for  stock  transactions,  or 
may  be  for  other  things,  but  as  they  are  not  dependent  on 
the  stock  transactions  oj  the  week  in  which  »hey  occur,  their 

correlation  high  (as  .«),  it  is  commonly  si;p[X)sc(i  that  a  very  hi^h  degree  of 
causiil  connection  is  i-stablished.  I  shall  not  jjo  into  detail  in  discussion  of  the 
methofl.  .My  personal  judnment  is  that  it  is  overrate*!,  that  "s|inrious" 
correlations,  leadinR  to  quite  ernmcous  conclusions,  have  fre(iuently  re- 
sulted from  it,  and  that  the  lalx)r  involvwl  in  calculating  loellkients  of 
correlation  is  frcqucnth  too  great  for  the  results  ohtaincd.  F  shoul.l  never 
k'  disiK)se<l  to  accept  conclusions  based  on  a  "correlatitm  ccK-llicient "  unless 
there  were  other  con\erging  evidence  10  sup|M>rt  it.  fn  effect  we  have,  in 
the  coilliciint  of  Kirrelation,  nothing  more  than  a  refinement  of  the  method 
of  comparing  two  curves  on  a  graph.  The  turves  tell  the  story,  in  a  general 
way,  whereas  the  coedicient  of  correlation  sums  up  all  the  conitomitant 
variations  (and  disjigreements)  in  one  figure.  The  eye  does  not  readily 
compare  the  degree  of  relation  between  two  curves  with  the  degree  of  rela- 
tion lM:tween  two  others.  When  it  is  desired  to  know  which,  of  se\er.il  re- 
lationships, I,  (losest,  the  graphic  metlxHl,  or  the  meth(Ml  of  comparing 
scries  of  figures,  burdens  the  attention.  The  coellicient  of  correlation  con- 
denses the  information  to  sui  h  a  degrc-e  as  to  make  comparison  easy.  It  is, 
then,  merely  a  retmenient  of  familiar  statistical  methods.  Used  wisely, 
guidc(l  by  sound  theory,  it  aifis  in  presenting  facts.  It  enables  us  to  state 
quantitatively  things  we  already  know  qualitatively.  But  there  is  no  magic 
in  it:  As  I  have  mentioned  lK>ih  .Mr.  SillHrling  and  Professor  M(M)re  in  this 
connection,  it  is  proper  to  s;iy  that  Ua\\  of  them  are  fully  alive  to  the  dan- 
gers and  Hinitalions  of  the  metlxMl.  and  that  Professor '.M.M.re  emphasizes 
strongly  the  nee<l  for  soun.l  c;  pru>ri  testing  of  hy|M)thes«-s  Ufore  submitting 
llk-m  to  the  test  of  lorrtlation.  One  danger,  that  of  getting  a  high  correla- 
tion merely  In-cause  Ix.lh  of  the  \ari,il)li-s  comiiared  are  frouiiig  rapidly, 
ha>*  Uen  avoided  by  .Mr.  SillH-rling  by  the  use  of  successive  fxrrnilugr  devia- 
tions, instead  of  absolute  figures.  For  reasons  explained  by  .Mr.  SilU-rling 
in  a  fiK>(note.  he  use-;,  instead  of  the  "probable  error,"  a  statement  of  the 
numlH-r  of  observations.  Thus,  "r=«.7,S  (4(»  "  means  that  the  coefficient 
of  cor.-elalion  i-  .78,  and  that  there  are  4O  observations  for  c.ich  of  the  two 
variables  lompared. 


TRADE  AVD  SPECULATION 


»39 


effect  is  to  lessen  the  evide:  'Rrce  of  connection  between 
stock  sales  and  clearings.  s  the  middle  weeks  show  a 

closer  correlation  between  the  'jvo  variables  than  do  all  the 
weeks  taken  as  they  come.  If  figures  for  the  month  were 
taken,  this  complication  would  be  smoothed  out,  and  a 
fairer  result  might  be  expected  to  apjiear.  The  middle 
weeks,  eliminating  monthly  settlements,  probably  eliminate 
more  other  things  than  they  do  share  sales  (which  are  in 
large  degrc>e  paid  for  in  24  hours'),  and  so  exaggerate  some- 
what the  relation  between  shares  and  clearings.  Monthly 
figures  avoid  both  complications,  tb'  igh  they  lose  some- 
thing of  the  concrete  causation.  An  intermediate  figure 
might  be  expected  for  the  monthly  correlation,  and  this  we 
find:  r  =  718(23). 

A  striking  single  fact  in  connection  with  these  figures, 
giving  them  point  as  less  extreme  variations  could  not  do, 
is  found  in  the  behavior  of  clearings  when  the  Stock  Ex- 
change was  closed,  during  the  crisis  of  1914.  At  that 
time,  New  York  clearings,  which  had  been  about  twice  as 
great  as  country  clearings,  fell  suddenly  below  country 
clearings.  When  the  Stock  Exchange  was  opened,  the  old 
proportions  suddenly  reappeared. 

That  speculation  spreads  far  beyond  New  York,  New 
York  being  the  centre  for  dealings  in  securities,  etc.,  which 
involve  the  whole  country,  is,  of  course,  well  known.  The 
extent  of  this  Mr.  Silberling  seeks  to  measure  by  correlating 
clearings  outside  New  York  with  New  York  share  sales. 
His  weekly  correlation  for  these  two  variables  for  1909-10 
gives  r  =  .368(103),  and  the  correlation  for  the  mid-weeks 
gives  a  higher  figure,  r  =  .424(46).  The  monthly  correla- 
tion shows  r  -  .257(23),  a  lower  figur%  "which  is  perhaps 
due  in  part  to  the  fact  that  the  bulk  of  the  outside  monthly 
clearings  show  relatively  moderate  fluctuations,  because 

'  riuy  get  intd  iluarinKs,  however,  Iwo  days  after. 


?40 


THK    VALUE   OF   MONEY 


I 


of  their  diverse  comiH)sitii)n,  and  are  less  sensitive  than  the 
periods  of  shorter  length.  " 

Seeking  an  index  ot  the  variations  of  that  trade  which 
is,  in   Professor   Fishers  phrase,  governed  by  "physical 
capacities  and  technicjue"    a  law  which  Professor  F'sher.' 
as  we  have  seen,  would  apply  to  the  great  total  of  J87  bil- 
lions which  he  has  constructed     Mr.  Silberling  chooses  the 
gn)ss  earnings  of  the  principal  railways  as  the  best  available 
test.     Railwa\s  deal  with  all  manner  of  other  enterprises. 
He  correlates  this  with  clearings  outside  Xew  York.    " The 
question  might  arise  at  once  whether  changes  in  traffic 
are  strictly  concomitant  with  changes  in  i)a\-ments  involve<I 
by  it,  and  therefore  with  the  clearings  resulting.    The  pre- 
liminary h\iK)thesis  that  a    lag"  ensuetl  between  traffic 
and  the  bulk  of  the  pa>-ments  was  first  tested  by  correlating 
the  railway  figures  with  clearings  of  one  month  -  and  two 
months    later,    but    no    correlation    was   obtained.    The 
direct    month-to-month   correlation   yielded,    however,   a 
result  r  =  524(23)."    This  suggests  that  outside  clearings 
are.  in  substantial  degree,  an  inde.x  of  physical  trade,  but 
Mr.  Silberling  calls  attention  to  certain  chance  agreements 
Ix'tween   railway   traflic  and  sjujculation   in   cotton   and 
protluce  and  grain,  speculation  in  the  crops  which  are  in 
current  movement,  and  regulariy  recurring  concomitances 
between  traflic  and  spi*culation  in  March,  when  the  rail- 
way traffic  revives  after  the  February  lull,  and  when  there  is 
a  large  mass  of  dealing  in  Spring  deliveries  in  Chicago.    In 
view  of  the  facts  later  to  be  developed,  with  reference  to  the 
small  actual  value  of  the  necessary  physical  exchanges 
(partially  covered  alread})  as  compaied  with  clearings, 

'  l'rofes.st)r  KemmertT,  also.    See  iiis  index  of  variation  of  trailc,  up.  cil 
pp.  i.^o   l.<l. 

'  It  is  unfiirtunato  that  wt-ikly  (inures  from  niilways  do  not  ivjst  in  siu  h 
num»H-r.  .i-  f.ir  mads  <if  sullKitnt  im|H)rtanro,  to  jiislif\  torn  lations  of  the 
weekl)  liKuns  with  i  learinns. 


TRADE   AND  SPECULATION 


241 


this  query  is  well  put.  We  may  easily  have  here  a  "spu- 
rious" correlation.  Taking  it  at  its  face  value,  however, 
and  taking  the  correlation  as  indicating  tlie  influence  of 
physical  trade  on  bank  transactions,  we  get  the  following 
results,  when  total  clearings  for  the  country  are  compared 
with  (a)  Xew  York  share  sales,  and  (b)  with  railway  j^ross 
earnings:  U)  r  =  .607(23);  (b)  r  =  .356(23).  "Physically 
determined  trade"  is  at  best  a  minor  factor  in  that  total 
"trade"  repn-stnted  by  bank  transjictions! 

Mr.  Silbcrling  has  buttressed  his  results  -.ith  a  consider- 
ation of  various  alternative  possibilities  which  might  give 
them  a  difTercnt  interpretation.  I  neetl  not,  for  present 
purjjoses,  go  further  into  his  figures.'  Taken  in  conjunc- 
tion with  the  other  data  i^rcsented,  and  to  be  presented, 
together  with  the  theoretical  disScussion  of  the  nature  of 
trade,  and  its  relations  to  money  and  crerlit,  which  the 
present  volume  contains,  they  give  the  present  writer 
abundant  confidence  in  the  thesis  that  the  great  bulk  of 
trade  in  the  United  States  is  .specti.ation,  rather  than 
that  sort  of  trade  which  is  determined  "by  physical  capac- 
ities and  technique." 

The  figures  given  above,  of  the  inventory  of  wealth  at  a 
given  moment  of  time,  by  the  Bureau  of  the  Census,  show 
only  trifling  magnitudes,  as  comi)ared  with  the  estimated 
387  billions  of  de{X)sits  made  in  i(/;q,  of  items  which  could 
enter  into  ordinary  trade,  as  distinguishtifl  from  specula- 
tion and  dynamic  readjustments.  An  effort  lo  calculate 
ordinary  trade  on  the  basis  of  figures  running  through  the 
year  may  throw  further  light  on  the  problem.  Railway, 
gr«).ss  receipts  for  the  year  emiing  June  30,  1909,  were  less 
than  two  and  a  half  billions.     This  is  si.x-tenths  of  i'  ^ 

'  I'rofcssur  \V.  .M  IVr>4m>  informs  nic  ihat  .\Ir.  Sill,  (inK's  nsulls  .ire 
ill  aaord  with  .alt  illations  vvhiih  hi  has  made.  Vide  hi  irticlc  in  the  Am. 
luoH.  Rev.  of  Dfi:.  lyifi. 


\m 


242 


THK    VALUE   OF   MONEY 


of  the  total.  Receipts  of  the  Western  Union  Telegraph 
Company  were  $^0,451,07^-  less  th;in  one-hundredth  of 
i*^, .  The  Post  Ofhce  in  the  liseal  year  ending  in  iqck;  took 
in  $203,562,383.  I'his  is  something  over  one  twentieth 
of  i^/'(.  These  are  gigantic  sums.  But  they  are  insignifi- 
cant indeed  in  this  (omi)utation.  Miilicms  of  .smaller  items 
simply  do  not  count  at  all  ten  million  items  of  S387  each 
would  give  only  i' ;.  The  total  net  innmie  of  the  United 
States,  as  estimated  by  \V.  I.  King  for  1910,  including  all 
forms  of  income,  dividends,  interest,  wages,  rents,  i>rofits, 
salaries,  etc.,  is  830,500,000,000  '—around  7';^  of  the  387 
billions. 

Let  us  sum  up  the  major  items  of  ordinary  trade.  From 
Kinle)'s  figures,  we  may  get  some  idea  of  the  i)roportions 
of  wholesale  and  retail  trade  to  the  total  for  1909,  assuming 
that  the  deposit  figures  indicate  that  total.  Retail  deposits 
make  up  less  than  one-eleventh  of  the  total,  and  wholesale 
deposits  about  two-elevenths.  The  figures  were:  retail, 
60  millions,  wholesale,  124  millions,  and  'all  other."  502 
millions.  But  the  "all  other"  deposits  were  lower  than 
normal.  New  'S'ork  City  was.  in  the  first  place,  probably 
less  complete  than  the  rest  of  the  country,  in  the  figures  re- 
turned, and.  in  the  second  phut'.  New  York  City,  as  shown 
by  the  clearings  of  Manh  17  (the  ne.xt  day,  when  checks 
deposited  in  Xew  York  would  get  into  the  clearings)  was 
28',,  beh)w  normal.  The  rest  of  the  country  was  within 
3','  of  nonnal.'-  Not  to  refine  matters  too  much,  wc  shall, 
on  the  assumption  that  the  variable  element  in  Xew  York 
deposits  is  (onnccted  with  the  Stock  Exchange  (as  .shown 
by  Mr.  SilberlingV  correlations  and  t)tber  considerations), 
and  on  the  assumption  that  deposits  connecttnl  with  the 
stock  market  ap|)ear  in  the  "all  other"  dejM)sits,  add  a  little 

'  The  \\r,ilUi  ,111(1  Iwimu-  of  the  Profit,  „{  tli,-  l,iil„l  Sl.it,..  Xtnv  S'ork,  i<»i5. 
•Sti-  our  .haptir,   •Siali-tiiai  l)ini<>n-lr,ili<.ii>  of  ihi  Oimntily  Thcoo' " 


TRADE  A>n)  SPECULATION  24  ^ 

over  20*^;  of  New  York's  total  of  198  millions,  or  40  millions. 
to  the  "all  other"  deiwisits  for  the  country.  leaving  the 
wholesiilc  and  retail  deposits  unchanged.    What  error  there 
IS  in  this  is  favorable  to  the  wholesale  and  retail  dqiosits. 
Our  proportions,  then,  are:  retail,  60,  wholesale,   124   "all 
other,"  54,.  total,   726.     If  the  retail   deposits   correctly 
represented    retail    trade,   we  could  then  sav   that    retail 
trade  was  a  little  less  than  one-twelfth  of  the  whole  and 
wholesale  trade  about  one-sixth.    But   there  are  many 
speculative  transactions  engaged  in  by  wholesalers,  and  a 
good  many  by  retailers.    The  writer  knows  a  small  delica- 
tessen dealer  on  Amsterdam  Avenue,  in  Xew  York,  who  fre- 
quently speculates  in  eggs  and  canned  goods.    A  colleague 
m  the  Harvard  Ciraduate  School  of  Business  AdministraUon 
IS  authority  for  the  statement  that  spcculaUon  in  canned 
gmxls  and  some  other  things  is  quite  common  among  re- 
tailers, particularly  "hedging"  by  the  use  of  "futures,"  in 
canntHl   g,>ods.     SjK-culation   among   wholesalers   is   very 
extensive.     The    same    is    true    of    manufacturers.    The 
siime  authority  cited  some  cotton  manufacturers  whose 
profits  from  cotton  speculation  are  greater  than  their  profits 
fr^.m  manufacturing.     We  shall  see  rea.son  to  suppose  that 
a  \  cry  substantial  part  of  manufacturers'  deposits  were  in- 
cluded in  the  wholesale  deposits.    That  the  figures  for  re- 
tailers' deposits  exaggerate  the  retail  trade  may  appear 
from  several  consideraUons:  (i)  The  pro{K)rtion  of  checks 
to  cash  rei)orted  is  too  high:  73.2' c-     Dean  Kinley  al- 
lows s'v  of  the  checks  deposited  to  be  " accommodaUon 
checks,"  '  cashetl   for  customers,   rather  than   taken   in 
in  trade.  (2)  If  retail  deposits  are  taken  as  exactly  rep- 
resentative of  retail  trade,  we  should  get  a  retail  trade 
fur  the  year  of  over  ^2  billions  (1-12  of  387  billions),  which 
would  excecxl  the  total  income  of  the  countr)-  as  calculated 

'  Lm.  I  it.,  j)i>,  78-79. 


244 


THK  VALtTE   OF  MOXFY 


by  King  for  1910.  Dean  Kinlcy  reached  the  conclusion 
that  the  retail  (ie{)<)sits  rej)<)rte(l  in  i8()6  also  exceeded  the 
probable  retail  expenditures.'  Of  course,  not  all  of  retail 
trade  is  in  consumption  goods.  Hardware  .stores,  lumber 
stores,  ami  some  other  retail  establishments  sell,  not  only 
to  householders  for  domestic  use.  but  also  things  which 
enter  into  further  j)ro(luction,  and  so  do  not  come  out  of 
annual  income.  If  we  include  in  retail  trade  various  items 
which  were  not  included  there  in  Kinley's  figures,  such  as 
hotels,  theatres,  new.spaper  receipts  from  subscription  and 
slreet  sales,  physicians'  fees,  etc.  all  tho.se  items  which 
enter  into  the  domestic  budget,  including  domestic  service, 
we  should  still  not  be  justified  in  reaching  a  total  as  great 
as  the  total  income  of  society,  since  there  would  then  be  no 
allowance  for  savings,  which  we  should  not  count  in  trade, 
or  for  life  insurance,  which  we  shall  count  separately.  The 
items  sold  at  retail  which  enter  into  further  prcxiuction 
cannot  make  a  great  total,  since  large  pnKiucers  buy  such 
things  at  wholesale.  Total  retail  trade,  therefore,  and,  in 
addition  all  the  other  items  in  the  domestic  budget,  must 
be  held  below  the  figure  for  total  national  income.  Sup- 
j)ose,  to  be  very  liberal,  we  allow  29  billions  -  for  all  these 
items,  under  the  general  head  of  "retail  trade." 

For  wholesale  trade,  if  we  take  the  ligures  at  face  value, 
the  estimate  would  be  6534  billions  (^-*/nr,  of  387  bil- 
lions, or  if'c  <^>f  387  billions).  But  we  have  .seen  that 
there  is  a  great  deal  of  speculation  among  wholesalers. 
Not  all  of  their  deposits,  by  any  means,  represent  receipt* 
from  ordinary  business.  Moreover,  there  is  much  over- 
counting here,  several  checks  being  used  for  one  trans- 
action, especially  where  wholesalers  have  branch  houses, 

'  Jour,  of  Polil.  Eton.,  vol.  v,  p.  ifi.s- 

'  F.ven  this  is  too  high,  for  i<)ck),  on  the  Iwsis  of  our  estimate  for  net  in- 
come in  igcx;,  in  the  .Appendix  In  this  »  haptrr. 


TRADE   AND   SPECULATION 


245 


ami  checks  connected  with  loans  and  repayments,  and 
transfers  of  funds  from  one  bank  to  another.  How  much 
\vc  should  subtract  for  this  there  is  no  way  to  tell. 
Ill  the  ca.se  of  retail  figures,  we  have  the  additional 
check  of  the  figures  for  total  net  income,  but  there  is  no 
such  check  here.  We  shall,  therefore,  make  no  subtrac- 
tion, but  shall  content  ourselves  with  pointing  out  that  we 
are  allowing  many  billions  '  to  ''ordinary  trade"  to  which 
it  is  not  entitled,  which  will  much  more  than  offset  errors 
in  the  opposite  direction  which  the  reader  may  find  in  our 
computations. 

Do  manufacturers'  receipts  from  first  sales  belong  in  the 
wholesale  deposits,  or  must  they  be  counted  as  a  separate 
item?  Dean  Kinley  does  not  say.  In  his  list  of  items,  as 
reported  by  banks,  that  go  in  the  "all  other"  deposits,^  he 
does  not  mention  manufacturers,  and  the  item  is  far  too 
important  not  to  have  been  mentioned  by  so  careful  a 
writer  had  he  supposed  that  it  belonged  there.  If  manu- 
facturers' first  receipts  belong,  not  in  the  wholesale  deposits, 
but  in  the  "all  other"  deposits,  then  we  should  expect 
manufacturing  cities  to  show  a  high  percentage  of  "all 
other"  deposits  a>  compared  with  wholesale  deposits.  The 
city  of  Pittsburg  should  be  a  good  test  case.  The  figures 
there,  for  State  and  national  banks  and  trust  companies,  are: 


Per  Cent. 

Q.6 

29-7 

60.6 


Retail  deposits $1,061,420 

Wholesale  dejwsits 3,368,004 

"All  other"  deposits 6.672,378 

For  Pittsburg,  the  percentage  of  "all  other"  deposits 
is  lower  decidedly  than  the  percentage  for  the  country  as 

'  The  extent  of  speculation  in  wholesale  trade  is  discussed  in  this  chapter 
tnfra.  "  I  )ouble  counting  "  is  discussed  in  the  chapter  on  "  Statistical  Demon- 
st rations  of  the  Quantity  Theory." 

^  Tkf  L'if  of  Credit  Instruments,  p.  151. 


! 


11 


246 


THE   VALUE  OF  MONEY 


a  whole  (about  75%).  much  lower  than  for  cities  where 
there  is  active  speculaticvn,  as  Chicago  atid  St.  Louis,  to  say 
nothing  of  New  York,  and  is  closer  to  the  percentage  of  the 
South  Atlantic  States,  52',',  than  to  the  average  for  the 
country.  The  wholesale  <leixjsits  of  Pittsburg,  however, 
rise  to  29.7*^1,  as  against  an  average  for  the  country  of 
17*^^.  There  is  nothing  in  these  figures  to  suggest  that 
manufacturers'  first  receipts  arc  exclusively  in  the  "all 
other  "  deposits.  I  should  think  it  safe  to  hold  that  a  sub- 
stantial part  of  them  were  included  in  wholesale  deposits, 
and  so  already  accounted  for  in  our  estimate.  The  total 
value  of  products  manufactured  in  1909  was  $20,672,051,- 
870.  I  shall  allow  $5,672,051,870  of  this  to  have  been 
alreafly  accounted  for  in  our  estimate  of  wholesale  trade, 
and  count  15  billions  of  it  as  a  separate  item.  If  there  is 
an  error  here,  it  is  very  much  more  than  offset  by  our 
failure  to  subtract  anything  from  the  wholesale  figures  for 
speculation.  I  think  it  probable  that  much  more  of  the 
figures  for  manufactures  should  be  assigned  to  the  whole- 
sale figures  than  I  have  assigned. 

To  these  figures,  we  may  add  a  number  of  other  items, 
absolutely  great,  but  insignificant,  in  comparison  with  the 
387  billions  not  only,  but  also  with  the  figures  for  retail 
and  wholesale  trade  already  reached.  These  are:  total 
farm  value  of  farm  products  (not  nearly  all  of  which  is  sold 
off  the  farm)  $8,760,000,000;  total  mineral  products, 
$1,886,772,84  ;  total  mill  value  of  lumber,  $684,479,859; 
total  life  insurance  premiums  (much  of  which  is  savings, 
and  in  no  proper  sense  trade),  $748,027,892;  total  fire, 
marine,  casualty  and  miscellaneous  insurance,  $362,555,- 
850;  total  wages  and  salaries,  $14,303,000,000;  total  laad 
rent,  $2,673,000,000;  '  and  the  items  for  railway  gross  re- 

'  The  liffures  for  rent  and  wapcs  arc  fnun  W.  T.  Kin(j.  "A  •il.    The  other 
ligurcs  art-  fri>ru  Ihw  SJuiiilkal  Abstract  uj Ikr  I'nitcd  Staffs,  unless  otherwise 


TRADE   AND   SPECULATION 


U7 


ceipts,  post  office,  telegraph,  already  mentioned.  The 
total  of  these  items,  together  with  retail  and  wholesale 
trade  and  manufactures,  is  8141,860,618,000.  This  is 
only  36.6*;^  of  the  total  of  387  billions.  It  leaves  over 
245  bilUons  unexplained.  What  can  the  245  billions  rep- 
resent? There  is  really  no  way  in  which  ordinary  trade 
can  make  up  more  than  a  very  few  more  billions,  so 
far  as  I  can  see.  There  remain  no  items  as  big  as  i'  i 
of  the  total,  and,  as  we  have  seen,  small  items,  «)f 
hundreds  of  dollars  each,  are  like  "infinitesimals  of  the 
.second  order"— they  simply  do  not  count  at  all  when  such 
staggering  figures  are  involved.' 

stilted.  King's  estimates  are  for  1910.  The  other  figures  are  for  1009. 
lornparc  this  list  with  my  discussion  in  the  Annalist,  March  6,  igi6,  p.  ^17, 
where  I  made  computations  purposely  much  t<M>  large.  In  that  computa- 
tion I  clearly  greatly  exaggerate*!  sidaries  and  prnfessionul  incomes,  and 
rent  as  well  as  retail  and  wholesale  trade.  My  figure  there  include*!  the 
rent  of  houses  as  well  as  the  rent  of  land.  King's  figure  is  only  for  land 
rent.  However,  in  view  of  the  fa<  t  that  a  high  percentage  of  real  estate 
is  used  by  the  owner,  with  the  result  that  no  rcnt-|)ayment3  are  required, 
I  think  King's  figure  high  enough  for  the  whole  item. 

'  Professor  I'isher  has  estimated  total  real  estate  exchanges  in  the  coun 
try  at  less  than  i'(  <if  the  total  .^H;  billions  {op.  cil.,  p.  22b),  and 
a  colleague  of  the  Har\ar(l  Business  .Sc1um)I  has  given  mc  an  estimate  of 
81,500,000,000  for  total  advertising  in  the  Unitinl  Slate>.  .Veither  of  the>c 
items  is  i)ro[K-rly  coimted  [wrt  of  tlic  "static"  trade  that  would  cxcur  were 
tilings  in  "normal  efiuilibrium."  If,  however,  we  counted  them,  wc  should 
add  only  i';,  siy,  of  the  total.  When  it  is  seen  how  insignificant, 
in  (omiMirison  with  the  387  billions  indicated  by  deiK.sits,  the  figures  for 
total  manufactures,  total  farm  pnxlucts,  and  total  wages,  are,  there  reallv 
is  little  need  to  argue  the  cast.  It  is  iin|x)ssiblc  to  find,  in  the  •ordinar;. 
tra<le"  wc  ha\e  not  mentioned,  items  whose  total  will  equal  the  least  of 
f  best'  three.  .Moreover,  we  have  alloweil  for  a  multitude  of  these  items  in 
IK-rniitling  the  figure  for  retail  trade  to  Ik:  as  high  as  it  is,  and  have  left  lar;;  • 
leeway  in  making  no  deduction  for  the  siRculation  in  wholesale  trade,  and 
in  counting  farm  products  in  full.  Interest  and  dividends  I  have  not  counted. 
I'liey  are  not  "trade.  "  When  we  have  counted  stix  k  sales,  we  have  already 
counted  the  exchanges  in  which  dividends  were  sold.  The  man  who  buyi 
the  st(H-ks  has  already  bought  the  dividends.  To  o)unt  the  uividend-  in 
addition  would  Ik;  a  (ase  of  that  double  counting  of  capital  and  income 
against  which  I'rofosor  Fisher  has  warned  us  in  his  Suture  of  Capital  and 
Iiiiome.  Rents  and  wages  represent  payment  for  current  services,  ami  are 
properly  items  of  trade.    Interest  and  dividunds  arc  une-sidcd  moBe>'  pay- 


248 


TIIF.  VALUE  OF  MOVKY 


There  remains,  then,  a  total  of  245  billions  of  check  ami 
money  payments  which  are  for  something  other  than  the 
ordinary  trade  of  the  country.     What  do  these  payments 
represent?     Much   of  this   total   represents  overcounting 
ami  duplications  of  various  kinds,  which  we  shall  consider 
in  a  later  chapter.    Much  of  it  also  represents  s[)cculation 
ami  dealings  other  than  speculative  in  securities.    When 
we  seek  to  find  actual  figures  of  transactions  in  any  field, 
retail,  wholesale,  or  speculative  markets,  or  anything  eNe, 
it  is  exccerlingly  dirticult  to  find  iinything  that  approaches 
the  amounts  indicated  by  the  banking  transactions  con- 
nected.    I  do  not  think  that  a  record  of  all  sales  would 
show  retail  sales  or  wholesiile  sjiles  anything  like  so  great 
as  the  figures  as  we  have  allowed  for  them  on  the  basis  of 
the  retail  and  wholesale  deposits.    When  we  look  at  the 
recorded   figures  of  transactions  on   the  speculative  ex- 
change   (or  at  estimates  which  competent  observers  make 
when  records  arc  not  available),  the  figures,  though  very 
large,  do  not  begin  to  equal  the  banking  figures  with  which 
we  have  to  deal.    The  New  York  Stock  Exchange  in  1909 
showed  sales,  recorded  on  the  ticker,  of  nearly  215  million 
shares  of  stock,  with  an  approximate  value  of  over  19  bil- 
lions '  of  dollars.     This  was  not  an  extraordinary  year. 
In  1 901  nearly  266  million  shares  were  sold,  in  1905,  over 
263  millions,  in  1906,  over  284  millions.    A  number  of 
other  years  have  approached   the  figures  for   1909.     If 
stock  sales  be  a  gotxl  index  of  general  speculation,  1909  is  a 

ments,  lumplctitiK  tranNuc  lions  for  which  money  hiis  uircatiy  |»as.sc(i,  .ami 
in  which  a  man  is  mirtly  wttinn  ji  delivery  of  something  he  has  .ilrearty 
bouRht.  In  Ktnenil,  l<>.ins  and  repayments  are  not  profurly  counte<l  as 
jKirt  of  ordinary,  or  physical  trade.  If,  li.mever,  wc  coimtnl  total  (()i|Hirate 
dividends  and  interest  we  should  Ket  only  S4,7Si,ooo,cxx)  (KinK's  estim.ile, 
liH.  fit.,  p.  2t)i).  This  is  a  little  over  i','  What  else  is  there?  In  his 
article  of  .March  i,j,  kji*.,  in  the  AiiiuUisI,  l'rofes.s»r  l-'ishcr  faile<l  to  nv  Jt 
my  s\inKestion  that  a  hill  of  (wrticulars  was  callwl  for! 

'  .See  the  table  of  shares  ami  approximate  \alues  in  Pratt's  Hork  of  WuU 
Street,  i(>i  J  ed.,  p.  187.    This  table  covers  the  years,  iSiyo  1911. 


TRADE   AND  SPECULATION 


240 


very  satisfactory  year  from  which  to  have  got  figures,  as 
showing  neither  extreme  s|K>culation,  nor  extreme  (iullnesH 
-  -which  latter  was  the  case  in  1896  when  Kinley's  other 
l>ig  investigation  was  made.     The  figures  for  shares  sold, 
however,  do  not  exhaust  the  business  done  at  the  New 
\'ork  Stock  Exchange.     "Odd  lots,"  /.  e.,  sales  of  less  than 
100  shares,  are  not  recorded  on  the  ticker.     Mr.  Byron  W. 
Holt  estimates  that  from  25  to  30^  would  be  added  if  they 
were  counted.     DeC'oppet  and  Doremus,  of  Xew  York, 
who  handle  at   least   as  much  of  the  "odd  lot"  busi- 
ness  as  any  other  Xew  York  house,  have  given  me  the 
fdHowing  information  about  the  "otid  lot"  business:  (i) 
the  volume  of  odd  lot  sales  is.  roughly,  from  20  to  25% 
of  the  volume  of  hundred  share  sales;  (2)   the  odd  lot 
business  fluctuates  in  conformity  to  the  hundred  share 
market;  (3)  the  odd  lot  speculator  is  just  as  likely  to  be  a 
"bear"  as  is  the  hundred  share  speculator,  and,  in  general, 
«m1<I  lot  bu.siness  is  like  the  hundred  share  business.     If  we 
take  the  figure  on  which  these  two  estimates  agree,  25%, 
we  may  add   53^4    million  shares    to   our   215,  getting 
268;' 4  million  shares  for  1909,  with  a  value  of  about  24 
billions.     Bond  sales  recorded,  would  add  alx)ut  i  billion 
more.     There  are.  further,  some  unrecorded  sales,  inde- 
terminate in   amount,   but  sometimes  very   substantial, 
when  brokers  have  a  number  of  "stop  loss"  orders.    They 
match  these  before  the  market  opens,  and,  if  the  prices  are 
reached  in  the  actual  trading,  these  sales  become  effective 
automatically,  without  getting  on  the  ticker.    How  ex- 
tensive this  is  cannot  be  state<l.     It  may  sometimes  add 
\ery  substantially.'    Thus,  on  the  floor  of  the  New  York 

'  Boston  Transcript,  "Ta|x.'  Record  of  Sales  Incomplete,"  May  6,  1916, 
Pi.  I,  |i.  12.  The  Transrripl  c|iiotes  as  aulliurity  the  New  V'ork  Commerfial. 
Following  the  txtraonlinury  market  of  Sept.  25,  igi6,  when  the  ticker 
rcionleil  2.317,000  shares  ?aM  on  the  -New  Vork  Stock  Kxchange.  the  nc\v«- 
iw|iers  cKtiniatetl  that  mis-sttl  ^Ics,  txld  k»Ls,  and  unrtvonlcd  sales  on  slop 


m- 


MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No    2) 


1.0 


I.I 


1.25 


;fiis 

•  63 

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2.5 
2.2 

12.0 
1.8 

1.6 


A  APPLIED  IM^GE     I 

:S'-  1^^3   East    Mam    Street 

S^^  Rochester.    New    York         14609        USA 

^S  ('"6)   *82  -  0300  -  Phone 

^S  t716)    268  -  5989  -  Fax 


250 


THE  VALUE  OF  MONEY 


I'l' 


( 


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i 


J  i 


Stock  Exchange  we  h.  -e  dealings  in  excess  of  25  billions 
for  1Q09.     This  is  nc;.;  y  as  large  as  the  figure  we  have  as- 
signed, on  the  basis  of  the  bank  figures,  to  total  retail  trade 
of  the  country,  and  it  may  well  exceed  the  retail  trade  in 
fact.     Recorded  sales  on  other  stock  exchanges  do  not,  in 
the  aggregate  for  the  country,  bulk  very  large.     For  1910, 
when  New  York  shares  reached  164  millions,  the  total  for 
Boston,  Philadelphia,  Chicago,  and  Baltimore  was  some- 
thing over  21  million  shares.  ^    The  New  York  Curb  has 
had  "  million  share  "  days,  but  the  average  value  of  shares 
is  low.    But  the  dealings  on  il]e  floors  on  the  exchanges 
and  "curbs"  are  far  from  all  of  the  dealings  in  securities! 
Only  securities  which   have  been  admitted  by  the  au- 
thorities are  dealt  in  on   the  exchanges.     The  volume 
of  unlisted  securities  is  enormous.      Moreover,  not  all, 
by  any  means,  of  the  sales  of  listed  securities  take  place 
on  the  floors  of  the  exchanges.    The  bond  expert  of  a 
large  banking  house  in  Boston  informs  me  that  the  "over- 
the-counter"  business  in  Boston,  both  for  stocks  and  for 
bonds,  much  exceeds  the  business  in  the  Boston  Stock  Ex- 
change, and  others  among  Boston  brokers  have  expressed 
the  same  opinion.    The  statement  has  been  repeatedly 
made  in  the  financial  press  that  of  the  bonds  listed  on  the 
New  York  Stock  Exchange,  ten  are  sold  over  the  counter 
for  one  sold  on  the  floor.     Evidence  on  this  point  is  not  to 
be  had  in  definite  figures,  of  course,  but  I  have  found  no 
one  in  Wall  Street  who  regards  it  as  extravagant.    A 
single  big  bank  in  New  York  sold  $550,000,000  in  bonds  in 
1911— more  than  half  the  recorded  bond  sales  on  the  Stock 

loss  orders,  would  bring  the  total  above  3,000,000  shares.  There  was  an 
unusual  number  of  stop  orders  caught  that  day.  There  will  be  very  few 
other  sales  of  too  shares  missed  by  the  ticker,  except  in  times  of  extraor- 
dinary pressure.    .See  Boaton  Herald,  Sept.  26,  1916,  p.  i. 

■  Iloiiander,  J.  H.,  fiank  Loans  and  Mock  Exchange  Speculation,  Senate 
Document  589,  6ist  Congress,  2d  Session,  p.  23. 


TRADE  AND  SPECULATION 


251 


Exchange.'  I  should  not  know  how  to  estimate  the  vol- 
ume of  outside  dealings  within  many  billions  of  "probable 
error."  If  ten  billions  of  listed  bonds  are  sold  over  the 
counter  in  New  York  alone,  we  may  well  suppose  that  the 
volume  of  over-the-counter  sales  of  listed  and  unlisted  se- 
curities at  least  is  noi  smaller  than  the  recorded  sales  on  the 
floors  of  the  exchanges.  But  this  is  all  guess  work.  There 
are  no  definite  data. 

For  produce,  cotton,  and  grain  speculation  we  have,  in 
general,  estimates  rather  than  records.  For  the  Board  of 
Trade,  in  Chicago,  there  is  one  quite  striking  piece  of  in- 
formation. That  is  that  the  Federal  War  Tax  of  i  cent 
per  hundred  dollars  on  grain  and  provision  futures  on  the 
exchanges  produced  $2,000,000  in  Chicago  alone  in  1915.2 
For  the  purposes  of  the  tax,  deliveries  within  thirty  days 
were  counted,  not  as  futures,  but  as  "  spot "  transactions. 
The  tax  was  collected  almost  wholly  on  grain.  If  the 
above  figure  is  correct,  then  it  is  clear  that  dealings  in  these 
futures  of  oyer  thirty  days  aggregated  20  billions  of  dollars 
worth.  This  gives  no  estimate  of  spot  transactions,  which 
are,  however,  very  great.  All  this  trading  involved  less 
than  400,000,000  bushels  of  grain  received  at  Chicago— a 
little  over  a  billion  bushels  were  received  at  all  primary 
markets.  The  grain  received  at  Chicago  was,  thus,  (at 
80c.  per  bushel),  sold  sixty- two  times  over  in  these  futures, 
and  an  unknown  number  of  times  in  spot  transactions. 
There  are  further  enormous  spot  transactions  in  provisions 
of  various  kinds  at  Chicago. 

Chicago  is  the  great  centre,  of  course,  for  this  kind  of 
speculation  in  the  United  States.  It  may  well  be  the 
world's  chief  market,  so  far  as  futures  are  concerned,  though 
evidence  to  establish  such  a  thesis  is  not  at  hand.    London 

'  Pratt,  Work  of  Wall  Street,  19 12  ed.,  p.  264. 

^Annalist,  Dec.  27,  1915,  p.  719— "Selling  Phantom  Grain." 


252 


THE   VALUE   OF   MONEY 


•.f  n 


and  Liverpool  are  gigantic  centres  of  commodity  specula- 
tion. But  we  have  numerous  cities  in  the  United  States 
where  such  speculation  is  very  great.  St.  Louis,  Kansas 
City,  Minneapolis,  New  Orleans,  and  other  cities  are  active 
speculative  centres.  New  York,  while  small  in  its  volume 
of  grain  and  produce  speculation  as  compared  with  Chicago, 
is  the  world's  centre  for  cotton  speculation,  and  the  world's 
centre  for  futures  in  coffee,  though  yielding  precedence  to 
Havre,  Smtos  and  Hamburg,'  ordinaril}',  in  the  volume 
of  spot  coffee  transactions,  and  though  handling  only  a 
very  small  -mount  of  spot  cotton.  The  volume  of  cotton 
sold  in  an  ordinary  year  in  New  York  is  50,000,000  bales.' 
though  only  about  160,000  bales  are  ordinarily  received 
there,  in  a  year.'  In  the  five  years  preceding  1909,  the 
sales  on  the  New  York  Coffee  Exchange  averaged  over  16 
million  bags  of  250  pounds  each.'  In  1915,  7,2  million 
dollars  were  deposited  as  margins  in  connection  with  this 
speculation  in  coffee,  and  in  ordinary  years  this  runs  from 
25  to  30  millions,  according  to  the  Treasurer  of  the  Ex- 
change. The  relation  between  the  margins  put  up  and  the 
total  pecuniary  volume  of  trading  is  not  indicated,  but  in 
most  exchanges  the  actual  depositing  of  margins  is  a  small 
fraction  of  the  pecuniary^  magnitude  of  the  turnovers. 
Both  the  Cotton  and  the  Coffee  Exchanges  are  international 
centres.  The  Coffee  Exchange  now  handles  large  transac- 
tions in  sugar,  also. 
Contacts  between  the  organized  exchanges  and  ordinary 

'  My  information  regarding  the  Coffee  Exchange  in  New  York  comes 
from  the  Treasurer  of  llie  I'lxchange,  Mr.  Jas.  H.  Taylor,  through  the  cour- 
tesy of  Mr.  VV.  H.  Ahorn,  of  At)orn  and  Cushman,  New  \'ork. 

'•'  Re|K)rt  of  the  Hughes  Commission,  in  a|)|)endi.\-  to  Pratt's  Work  of  \\',ill 
Slrirt,  Rev.  eti.,  |).  417.  This  refwrt  gives  information  regarding  all  the 
organized  exchanges  in  .New  \'ork. 

'  L.  Conant.  Jr..  "The  United  .St.ifes  Cotton  Futures  .\ct,"  American 
Economic  Rrvim',  March,  IQ15,  p.  i. 

*  Hughes  Commission,  loc.  cil.,  p.  418. 


-  ■ 


TRADE   ANU   SPECULATION 


25,:} 


business  are  very  numerous.     Producers  in  every  line  who 
can  do  so  protect  themselves  by  "hedging"  in  the  exchanges 
which  deal  in  their  raw  materials.    This  is  a  commonplace, 
so  far  as  millers  are  concerned.     The  writer  has  found 
millers  in  a  town  off  the  main  lines  of  the  railroads  in  Mis- 
souri who  regularly  sell  short  a  bushel  of  wheat  on  the  St. 
Louis  Merchants'  E.xchange  for  every  bushel  they  buy  to 
grind.    The  business  man  who  does  not  sometime  take  a 
"flier"  in  the  market  for  other  than  hedging  purposes  is 
rare!    But,  apart  from  the  organized  markets  there  is  an 
immense  volume  of  speculation.    If  a  wholesaler  buys  only 
what  he  can  sell  to  retailers,  it  is  not  speculation.    But 
if  he  buys  in  excess  of  the  anticipated  demands  of  his  re- 
tailers, expecting  to  sell  the  excess  at  an  advance  to  other 
wholesalers,  he  is  speculating.    If  a  farmer  buys  cattle  to 
feed,  he  is  not  speculating,  but  if  he  buys  them  thinking  to 
sell  them  at  an  -  Ivance  in  a  short  time,  and  does  so,  the 
transactions  are  speculative.    The  line  is  not  easy  to  draw, 
in  practice.    Intention  is  shifting  and  uncertain.    There 
is  chance  in  ever>'  industrial,  commercial,  and  agricultural 
operation.    But  for  the  point  at  hand,  the  test  is  simple: 
do  more  exchanges  take  place  than  are  necessary,  under  the 
existing  division  of  labor,  to  advance  the  materials  of  in- 
dustry through  the  stages  of  production,  and  get  things 
finally  to  the  consumer?    If  so,  the  excess  of  exchanges 
is  speculative.    Trading  between  men  in  the  same  stage 
of  production   is  speculation.    It   represents   trading   to 
smooth  out  dynamic  changes,  to  bring  about  readjustments 
which  would  have  been  unnecessary  had  conditions  really 
been  static,  and  had  the  initial  plans  of  enterprisers  been 
adequate.    Trading    in    anticipation    of    further    trading 
with  men  in  the  same  stage  of  production  is  speculative. 
This  sort  of  thing,  in  the  wholesale  business,  especially,  is 
exceedingly  common.    This  has  been  noted  by  Professor 


254 


THE   VALUK   OF  MONEY 


'    f"     : 


Taussig,  and  made  by  him  an  important  point  in  the  theory 
of  crises.  Dean  Kinley  '  called  attention  to  it  as  a  matter 
of  importance  in  connection  with  his  investigation  in  1896. 
The  coming  of  cold  storage,  and  the  development  of  the 
canning  industry  have,  I  am  informed  by  a  colleague  in 
the  Harvard  Business  School,  enormously  increased,  this 
speculation  among  both  wholesalers  and  retailers,  and  it  is 
very  important  in  most  wholesale  lines.  There  is  short- 
selling  in  materials  for  construction  purposes,  and  in  metals, 
apart  from  organized  exchanges,  and,  where  possible,  con- 
tractors in  the  building  trade  often  protect  themselves  by 
means  of  future  contracts  with  speculators  who  are  selling 
short. 

Land  speculation,  in  varying  volume,  is  found  in  every 
part  of  the  country.  There  is  speculation  in  leases,  in 
options  on  real  estate,  and  in  options  on  leases.-  It  may 
be  noticed,  too,  that  sales  of  "rights,"  of  puts  and  calls 
and  straddles,  and  other  contract  rights,  are  regular  factors 
in  the  organized  exchanges.  Wherever  profits  are  to  be 
made  by  leveling  values  as  between  different  places  or 
different  times,  speculation  arises,  and,  with  dynamic 
change,  this  means  everywhere,  in  every  business,  and  all 
the  time:  The  shifting  of  labor  and  capital  from  industry 
to  industry,  leveling  returns  to  capital  and  labor,  involvei 
an  enormous  amount  of  trading  that  would  not  occur  in  a 
"  normal  equilibrium."  Much  of  this  the  Stock  Exchange 
does.  That  is  what  it  is  for.  But  much  of  it  has  to  do 
with  unincorporated  industry,  and  a  vast  deal  of  speculative 
exchanging  takes  place  to  this  end  apart  from  the  organized 
exchanges. 

Speculation  in  bills  and  notes,  by  note-brokers  and  par- 


'  Taussig,  Principles  of  Fxonomirs,  T.  p.  405;  Kinlc\-,  Tfc/jor/  <.■/"  Ilir  Comp- 
troller for  1896,  p.  8g. 

^  This  is  probably  more  extensive  in  London  than  in  the  United  States. 


TRADE  AND  SPECULATION 


'5S 


ticularly  by  dealers  in  foreign  exchange,  occurs  on  a  large 
scale,  and  accounts  for  a  great  deal  of  the  hanking  figures. 
This  has  nothing  to  do  with  physically  determined  trade. 
From  the  standpoint  of  Professor  Fisher's  "equation  of 
exchange."  it  must  be  barred,  if  the  contention  that  "  trade" 
is  determined  by  "physical  capacities  and  technique"  is  to 
be  adhered  to.  Speculation  in  demand  finance  bills  is 
barred  in  any  case,  since  "money  against  checks,"  and 
"checks  against  checks,"  are  excluded  by  his  definition.' 
But  as  an  explanation  of  no  small  part  of  our  unexplained 
245  billions  of  dollars,  these  items  must  be  brought  in. 
They  are  "double  counting"  from  the  standpoint  of  Pro- 
fessor Fisher's  equation.  They  are,  however,  speculation. 
An  official  in  a  great  New  York  banking  house,  in  charge  of 
the  foreign  exchange  department,  writes  that  in  times  when 
exchange  rates  are  fluctuating,  enormous  quantities  of 
drafts  on  Europe  will  be  bought  and  sold,  during  a  period 
of  a  couple  of  weeks  or  months,  whereas  under  other  con- 
ditions such  transactions  might  amount  to  little  with  the 
same  volume  of  imports  and  exports.  The  part  of  this 
which  is  between  banks,  a  very  big  item,  would  not  count 
in  the  245  billions,  but  to  the  extent  that  foreign  exchange 
brokers  outside  the  banks  participate,  their  activity  helps 
to  explain  our  245  billions. 

If  it  be  true  that  speculation,  including  all  manner  of 
readjustment  to  dynamic  changes,  makes  up  the  over- 
whehning  bulk  of  trade  in  the  country,  then  Fisher's  indicia 
of  variation  in  trade,  weighted  as  they  are,  are  totally  mis- 
leading. The  same  is  true  of  Kemmerer's  indicia  of 
"growth  of  business."  ^  These  are:  population,  tonnage 
entered  and  cleared,  exports  and  imports  of  merchandise, 

'  Loc.  cil.,  p.  47. 

-  Loc.  cU.,  pp.  130-131.  The  ver>'  title,  "growth  of  business,"  suggests  the 
fallacy  to  which  we  refer  in  the  text,  namely,  that  we  have  a  steady  upward 
movement,  with  little  variation.    This  is  largely  true  of  production  and 


I   > 

i 


?S6 


THi:   VALUE   OF  MOXEY 


postal  revenues,  gross  earnings  of  railways,  freights  carried 
by  railways,  receipts  of  the  Western  Union  Co.,  consump- 
tion of  pig  iron,  bituminous  coal  retained  for  consumption, 
consumption  of  wheat,  consumption  of  corn,  consumption 
of  cotton,  consumption  of  wool,  consumption  of  wines  and 
liquors,  market  values  of  reported  sales  on  the  New  York 
Stock  Exchange.  Only  the  last  of  these  is  in  any  sense  an 
inde.x  of  speculation.  It  is  swallowed  up  by  being  put  on  a 
par  with  the  other  fourteen  items.  Its  influence  on  the 
final  index,  made  by  averaging  the  others  is,  as  inspection 
shows,  virtually  nil.  Out  of  the  twenty-sLx  years  his 
figures  cover,  the  general  index  moves  counter  to  the  share 
sales  14  times  I  Utterly  random  figures  would  have  come 
nearer  to  the  facts  in  the  case.  It  is  particularly  striking 
that  Professor  Kemmerer,  whose  total  figures,  as  Pro- 
fessor Fisher's,  rest  for  their  absolute  magnitude  on  Kin- 
ley's  investigation,'  should  assign  Sq^/q  of  his  estimated 
trade  (183  billions  in  1890)  to  wholesale  commodities,^ 
(with  i'/l  to  wages,  and  8%  to  securities),  when  Kinley's 
figures  show  that  wholesale  deposits  are  a  minor  fraction 
of  the  total! 

The  constancy  in  the  figures  of  these  two  writers  for 
trade  from  year  to  year,  a  general  steady,  upward  growth, 
does  indeed  suggest  that  trade  is  determined  "by  physical 
capacities  and  technique,"  and  that  it  does  stand  as  a  great, 
independent,  inflexible  factor,  independent  of  money  and 
deposits,  constituting  a  real  causal  coeflicient  with  them  in 
determining  prices.  If,  however,  speculation  is  as  big  a 
factor  as  our  analysis  would  indicate,  then  trade  is  a  highly 

consumption.     It  is  in  no  sense  true  of  "trade,"  as  distinguished  from  pro- 
duction. 

'  Kemmerer  relied  on  the  investigation  of  i8g6,  whereas  Fisher  used  more 

the  figure'*  of  iqoq.     Kcmmrror  cioes  not,  in  seneral,  :iS5iKn  an  absolute 
magnitude  for  "trade,"  but  for  uSgo  he  gives  a  figure.    Loc.  cil.,  p.  136.  J. 
^  Loc.  lit.,  p.  ij(),  d. 


TRADE   AND   SPECULATION 


257 


flexible  thing,  varying  enormously  from  year  to  year, 
moved  by  a  multiplicity  of  causes,  among  them  fluctua- 
tions in  particular  prices,  and  the  ease  and  tightness  in  the 
money  market— the  quantity  of  money  and  deposits. 

But  quite  apart  from  speculation,  it  is  not  true  that  trade 
is  a  mere  matter  of  physical  capacities  and  technique,  a 
passive  function  of  production.  Rather,  one  would  almost 
have  to  reverse  the  relation.     Production  waits  on  trade! 

Production,  as  now  carried  on,  is  primarily  conducted  in 
the  expectation  of  sale,  and  of  profitable  sale.  Trade  does 
not  go  of  itself,  automatically.  Rather,  it  is  a  highly  difficult 
matter,  calling  for  the  highest  order  of  ability,  and  the  labor 
of  innumerable  men.  In  general,  I  think  it  safe  to  say  that 
in  ordinary  times,  the  manufacturer  loses  vastly  more  sleep 
over  the  question  of  how  he  shall  market  his  output,  than 
he  does  over  the  question  of  how  he  shall  produce  it.  A 
clerk  in  the  Westinghouse  Air  Brake  Company,  engaged 
in  the  accounting  department,  spoke  recently  to  the  writer 
of  the  "productive  end"  of  the  business.  On  inquiry,  it 
developed  that  he  meant  the  selling  department!  He 
stated  that  the  manufacturing  department  also,  in  the 
language  of  the  employees,  in  that  corporation,  would  aJso 
be  termed  "productive,"  but  that  the  selling  department 
was  the  productive  department. 

If  one  reflects  a  little  as  to  the  proportion  of  "costs"  that 
go  into  selling,  as  compared  with  technical  "production,"  I 
think  my  point  will  be  clearer.  Advertising  has  developed 
so  enormously  that  it  needs  little  discussion.  It  has  been 
stated  that  the  "Sapolio"  people  once  tried,  after  their 
reputation  seemed  thoroughly  established,  to  stop  adver- 
tising, with  such  disastrous  results  that  very  extraordinary 
efforts  were  required  to  reestablish  the  brand.  Number  2 
wheat  is  not  advertised,  in  the  great  magazines,  but  in- 
numerable brands  of  flour  get  newspaper  and  magazine 


m 


258 


THE   VALUE   OF   MONEY 


ij  i 


advertising.— some  of  them  in  such  a  periodical  as  the  Sat- 
urday Evening  Post,  and  even  those  which  are  locally  con- 
sumed are  commonly  advertised  in  the  local  press.     Xor  is 
it  only  finished  j)ro(lucts,  of  the  sort  that  must  be  sold  to 
the  fickle  public,  that  invo've  these  heavy  selling  costs. 
The  writer  has  in  mind  a  corporation  producing  a  high- 
grade  type  of  glazed  retort,  in  the  production  of  which  it 
has  virtually  a  monopoly,  since  the  clay  with  which  it  is 
made  does  not  coexist  with  the  skill  to  make  it  in  any  other 
place.     The  particular  product  is  an  indispensable  part  of 
many  important  technical  processes.    Substitutes  made  of 
other  clays,  and  by  other  companies,  are  known  by  the 
trade  to  be  unsatisfactory.     The  buyers  are  all  highly 
trained  business  men.     Here,  if  anyvvhere,  selling  costs 
should  be  slight.     But  the  chief  selling  agent  of  the  corpora- 
tion has  found  it  necessary,  in  order  to  keep  the  business 
going,  to  incur  huge  expenses  for  entertaining  his  customers, 
finds  it  necessary  to  incur  great  travelling  expenses,  to  use 
only  the  most  expensive  hotels,  and,  incidentally,  to  drink 
a  great  deal  more  than  his  personal  inclinations  would  call 
for,  in  keeping  the  business  for  his  house.    I  waive  dis- 
cussion of  the  extraordinary  fees  which  a  trust  promoter 
makes,  in  efTecting  a  consoliflation  of  big  business  units, — a 
process  of  exchange.     I  am  speaking  now  of  the  ordinary 
costs  involved  in  ordinary  trade.    The  army  of  travelling 
salesmen,  the  body  of  stenographers,  who  write  letters, 
with  various  "follow-ups,"  in  the  effort  to  get  more  busi- 
ness, the  growing  complexities  of  such  letter  writing,  in 
which  all  suspicion  of  "circularizing"  must  be  allayed,  one- 
cent  stamps  being  absolutely  taboo!— these  things  are  the 
commonplaces  of  business.    They  are  in  the  primers  in 
the  "commercial  colleges"  and  "schools  of  commerce." 
Only  the  orthodox  economist,  with  his  doctrine  of  the  im- 
possibility of  general  overproduction,  is  ignorant  of  them  I 


TRADE   AND  SPECULATION 


259 


This  feature  of  modem  business  has  been  much  elab- 
orated in  a  recent  book  which  has  not  received  the  attention 
it  merits— though  its  strength  is  rather  in  criticism  than  in 
constructive  doctrine.    I  refer  to  Dibblee,  The  Laws  of 
Supply  and  Demand}    Dibblee  makes  an  interesting  con- 
trast between  commercial  and  manufacturing  cities,  main- 
taining that  the  former  necessarily  outgrow  the  latter— a 
contenUon  which  London,  New  York,  Chicago  and  other 
places  strikingly  illustrate.    He  presents  a  truly  remark- 
able fact  about  London: «  a  recent  report  of  the  Commis- 
sion on  London  Traffic  states  that  there  were  in  London 
638  factories  registered  as  coming  under  the  Factory  Acts, 
with  an  average  horse-power  of  54.    The  total  power  em^ 
ployed  within  the  London  area  under  the  Factory  Acts, 
chiefly  used  in  newspaper  printing,  was  34,750  horse-power 
—just  one-half  of  what  is  required  for  the  steamship, 
Mauretania!    This  is  the  greatest  city  in  the  worid.   What 
do  its  millions  do  for  a  living?  ^    The  town  of  Oldham,*  he 
asserts,  with   ioo,cxx)  inhabitants,  has  spindle  capacity 
enough  to  supply  more  than  the  regular  needs  of  the  whole 
of  Europe  in  the  common  counts  of  yam.    To  market  the 
output  of  Lancashire,  "the  merchants  and  warehousemen 
of  Manchester  and  Liverpool,  not  to  mention  tlie  marketing 
organization  contained  in  other  Lancashire  towns,  have  a 
greater  capital  employed  than  that  required  in  all  the  man- 
ufacturing   industries    of    the    cotton    trade."    Accurate 
estimates  of  the  proportion  of  "selling  costs"  to  costs  of 
technical  production  are  doubtless  impossible,  for  the  gen- 

"  A  recent  discussion  of  these  problems  is  to  be  found  in  Shaw,  A    W 
borne  Problems  in  Market  Distribution,  Harvard  Univ.  Press  igic  '' 

*0/..aV.,  pp.  51-52.  ' 

»  London,  Paris,  and  New  York  all  do  a  great  deal  of  manufacturing,  par- 
ticularly of  hner  things,  whose  value  is  hich.  and  which  require  a  hi^h  pn>- 
ix>rti,.n  "/labor,  as  compared  with  machinery.  Cf.  our  discussion'of  the 
London  "Money  Market,"  infra,  in  Part  III. 

*  Ibid.,  p.  47. 


26o 


niF   VAI-ITE   OF   MONF.Y 


Mi 


eral  field  of  trade,  and  precision  is  unnticssar\-  for  my  pur- 
[Mjst's.  Dil)l)kr's  runclusion,  after  contraslin;;  retail  and 
wholesale  priii-s,  and  analyzing  the  expenses  iniurred  in 
selling  prior  to  the  wholesale  stage,  is  that  the  lost  of 
marketing  is  at  least  ecjual  to  "real  cost  of  i)ro<luction," 
occasionally  onh  slightly  below  it,  and  t)ften  far  above  it 
(62).'  If  one  considers  how  large  the  item  of  "good  will" 
often  bulks  in  the  value  of  "going  concerns"  -—good  will 
being  in  large  degree  often  just  a  capitalization  of  prior 
costs  of  this  nature— Dibblee's  estimate  neeil  not  be  exag- 
gerated. Trade  connections,  trade-marks  that  have  repu- 
tation, etc.,  often  represent  enormous  t)utput  in  thought, 
work,  and  expense.  Selling  costs  may,  like  other  costs,  be 
divided  into  "prime"  and  "overhead"  costs.  Some  of 
the  latter  lead  to  long-time  consequences,  pay  for  them- 
selves only  in  the  long  run.  These  may  be  "capitalized" 
in  "good  will."  '  Of  course,  not  all  good  will  is  got  at  a 
cost.     Much  of  it  is  adventitious. 

In  the  light  of  the  doctrine  that  trade  is  independent  of 
money  and  credit,  one  wonders  why  it  shouki  be  thought 
necessary  to  extend  branches  of  American  banks  to  the 
South  American  markets  which  we  are  now  reaching  out 
toward.  And  why  have  Americans,  from  the  beginning, 
been  constantly  increasing  commercial  banks?  •*  It  is  easy 
to  sneer  at  the  efforts  of  the  successive  frontiers  in  our 

'  Cf.  Jenks,  The  Trust  Problem,  Rev.  cd.,  p.  2q.  The  doctrine  that  these 
rosts  are  nt^  social  loss  is  challenged  by  the  present  writer  in  an  article, 
"  ComiKitition  rs.  Monoiioly,"  in  the  New  ^■()rk  Independent,  of  Oct.,  191 2. 

2  "  Royal "  has  been  estimated  at  S5 .000,000;  "  S|)earmint "  at  Sioo,ooo,ooo. 
Mr.  Guy  C.  Hubbard,  of  the  Dry  G.'oJs  Economist.  Xew  \'ork,  has  given 
the  writer  some  exccedinsly  intere^tinj;  data  regarding  the  value,  i's  bank- 
able collateral,  of  various  trade-marks  and  firm  names. 

'  C/.  our  discussion  of  "The  Reconciliation  of  Statics  and  Dynamics," 
infra. 

*  Significant  in  this  connection,  i?  the  r.-.ntcntion  of  recent  "-tudcnt'-  of 
American  agriculture,  that  the  great  need  is  better  organization  and  credit, 
facilities  for  marketing. 


TRADE   AND   S»'hv  i  LATION 


.'6 1 


history  to  provide  themselves  with  banks  of  issue  as  based 
on  a  delusion,  the  delusion  that  bank-notes  are  "capital," 
and  to  say  that  their  real  need  was,  not  more  bank-cralit, 
but  more  real  eapital.     They  needed  more  tools  and  live- 
sfoik.  doubtless,  but  is  that  the  whole  stor>'?    And  were 
their  banks  of  no  assistance  in  getting  the  additional  cap-'^al 
of  various  sorts?    And  was  it  a  matter  of  no  consequence 
that   they  had  an  abundant  medium  of  exchange?    It 
seems  abnost  childish  to  put  such  questions,  but  the  quan- 
tity theory  has  as  its  logical  corollary  that  to  multiply 
banks  is  quite  useless  and  wasteful,  since  the  only  result  is 
to  raise  prices.    If  increasing  ba.ik-credit  cannot  increase 
trade  or  production,  this  corollary  is  inevitable.     Indeed, 
the  case  may  be  more  strongly  stated.    Quite  apart  from 
the  wasted  labor  of  bank-clerks  and  the  waste  of  banking 
capital,    the   efTect   of   increasing   bank-development,   on 
quantity  theory  reasoning,  is  harmful.    If  increasing  bank- 
credit  is  to  raise  prices  without  increasing  trade,  then,  on 
quantity  theory  reasoning,  it  must  depress  business.    The 
reason  is  that  rising  prices  in  a  given  region  make  that 
region  a  bad  place  to  buy  in,  and  so  curtail  its  exports. 
This  is,  indeed,  the  quantity  theory  explanation  of  inter- 
national trade,  to  which  attendon  is  later  to  be  given.    The 
country  which  is  expanding  its  banking  facilities  most 
rapidly  will  suffer  most  in  competition  in  the  world  markets. 
This  is  why  the  United  States  have  so  little  foreign  trade! 
It  also  explains  the  rapid  strides  that  China  and  Central 
Africa  have  recently  made  in  capturing  the  world's  markets. 
I  submit  that  there  is  no  flaw  in  this  argument,  if  the 
premise  of  the  independence  of  volume  of  trade  and  volume 
of  bank -credit  be  granted.     It  follows  from  the  quantity 
theory.    That  it  is  no  caricature  of  Fisher's  argument  will 
appear,  I  think,  from  the  following  quotation,'  which  very 

'  Lite,  fit.,  p.  «<j.    ThnuRh  Fisher  dcies  not  conclude  that  banking  is  bad, 


w 


I 


-    -  THE  VALUE  OF  MONEY 

nearly  states  what  I  have  just  been  saying,  though  it  does 
not  draw  the  conclusion  that  banking  is  a  bad  thing:  "The 
invention  of  banking  has  made  deposit  currency  possible, 
and  its  adoption  has  undv>abtcdly  led  to  a  great  increase 
in  deposits  and  consequent  rise  in  prices.  Even  in  the 
last  decade  the  extension  in  the  United  States  of  deposit 
bunking  has  been  an  exceedingly  powerful  influence  in  that 
direction.  In  Europe  deposit  banking  is  in  its  infancy."  ^ 
Happy  Europe,  troubled  only  by  war!  It  is  greatly  to  be 
hoped,  in  the  interests  of  American  agriculture,  that  the 
efforts  to  increase  agricultural  credit  facilities  will  fail! 

We  are  driven  to  one  of  the  most  fundamental  contrasts 
in  economic  theory,  which  appears  under  various  guises 
and  in  differr-'^  forms:  statics  vs.  dynamics;  transition  vs. 
equilibrium,  theory  of  prosperity  vs.  theory  of  goods;  nor- 
mal tendency  vs.  "friction."  ^  Perhaps  Professor  Fisher, 
and  the  quantity  theorist  in  general,  would  dismiss  many 
of  these  conbiderations  as  not  applicable  to  the  gen- 
eral principle,  which  is  a  "normal"  or  "static"  or  "long 
run"  law,  not  subject  to  considerations  of  this  sort.  It  is 
scarcely  open  to  Fisher  to  defend  himself  this  way,  because 
of  his  exceedingly  uncompromising  statement  regarding 

he  does  conclude  that  gold  mining  is  a  parasitic  and  socially  injurious  in- 
dustry, like  the  making  of  burglars'  "jimmies."  See  his  Elementary  Prin- 
ctples  of  Economics,  X.  \.,  igi2,  pp.  499-500. 

'  Fisher  does  admit  that  the  character  of  the  banking  system,  and  of  the 
money  system,  will  affect  the  volume  of  trade.  "There  have  been  times 
m  the  history  of  the  world  when  money  was  in  so  uncertain  a  sta*e  that 
people  hesitated  to  make  many  contracts  because  of  the  lack  of  knowledge 
of  what  would  be  required  of  them  when  the  contract  should  be  fulfilled. 
In  the  same  way,  when  people  cannot  deiwnd  on  the  good  faith  or  stability 
of  banks,  they  will  hesitate  to  use  dcixisits  and  checks  "  (78).  But  there  is 
nowhere  an  admission  that  the  amount  of  bank-credit  has  any  influence 
on  the  volume  of  trade,  and  there  are  rei^eated  assertions,  as  already  in- 
stanced in  the  text,  that  the  volume  of  trade  is  quite  independent  of  the 
volume  of  money  and  bank-credit. 

'Part  rV  of  this  book  gives  ,a  detailed  analysis  to  tlie  problems  involved 
m  these  contrasts. 


TRADE   AND   SPECULATION 


263 


even  "transitional"  relations  between  volume  of  trade  and 
money  and  credit.  I  shall  not  reply  to  anyone  who  offers 
such  an  objection  by  a  general  tirade  against  "static  ei  - 
nomics."  I  believe  thorouglily  in  the  method  of  economic 
abstraction,  and  in  reaching  general  principles  by  ignoring, 
provisionally,  in  thought  the  "friction"  and  "disturbing 
tendencies"  which  often  make  the  first  approximations 
look  somewhat  unreal.  But  I  raise  this  question:  to 
what  feature  of  our  economic  order  do  we  chiefly  owe  it 
that  we  can  make  such  abstractions?  By  virtue  of  what 
does  friction  disappear?  What  is  it  that  makes  our  ab- 
stract picture  of  economic  life,  as  a  fluid  equilibrium,  with 
its  nice  marginal  adjustments,  its  timeless  logical  relations, 
correspond  as  closely  as  it  does  to  reality?    The  answer  is: 

MONEY  and  CREDIT.^ 

It  is  the  business,  the  function,  of  money  and  credit,  as 
instruments  of  exchange,  to  bring  about  the  fluid  market, 
to  overcome  friction,  to  effect  rapid  readjustments,  to  give 
verisimilitude  to  the  static  theory,  to  make  the  assumptions 
of  the  static  theory  come  true.  Where  exchange  is  easy 
and  friction  slight,  there  will  not  be  two  prices  for  the  same 
good  in  the  same  market.  Speculators,  seeking  profits  of 
fractions  of  a  point,  will  prevent  that.  By  multiplying  ex- 
changes, they  will  level  off  values  and  prices.  Because 
money  and  credit  ha\-e  done  their  work  so  thoroughly  in 
the  "great  market,"  it  is  possible  for  men  to  talk  about 
static  theory,  and  to  work  out  economic  laws  in  abstraction 
from  friction,  transitions,  and  the  like. 

In  the  static  state,  all  speculation  is  banished.  There 
are  no  price-fluctuations  to  be  smoothed  out,  no  new  pros- 
pects to  be  "discounted,"  no  uncertainties  to  be  guarded 

'  Thi-i  tho-iis  wa-;  set  forth  by  the  present  writer  at  l!ie  1^15  meeting  of 
the  Ameri<:an  Keonomic  .Association.  .See  I'apirs  and  Proceedings,  Supple- 
ment to  March,  1916,  Aiwr.  Econ.  Rev.,  pp.  168-1O9. 


264 


THE    VALUE    OF    MONEY 


II 


against  by  "hedging."    Seasonal  goods  will,   of  course, 
have  to  be  carried  over  from  one  season  to  the  next,  but 
this  will  involve  merely  warehousing  and  the  use  of  capital 
—"time  speculation,"  involving  many  sales,  does  not  come 
in.     One  sale  to  the  capitalist  who  carries  the  seasonal 
goods,  with  a  sale  by  him  to  the  man  who  means  to  use 
them,  will  suffice.     It  has  been  shown  before  that  the  great 
bulk  of  trade  is  speculation.    But  speculation  is  banished 
from  the  static  state.    Speculation  is  a  function  of  dynamic 
change,  waxing  and  waning  with  the  degree  of  uncertainty 
that  exists,  the  new  conditions  to  which  readjustments 
have  to  be  made,  the  "  transitions  "  that  have  to  be  efifected. 
In  other  words,  the  laws  governing  the  volume  of  trade  are 
dynamic  laws,  laws  of  "transition  periods,"  and  so  the 
whole  notion   which   underlies   the   quantity   theory,   of 
"normal  periods."  "static"  relations,  etc.,  is  here  irrelevant. 
Volume  of  trade,  as  distinguished  from  volume  of  produc- 
tion, is  controlled  by  the  number  and  extent  of  the  "transi- 
tions" that  have  to  be  made.    The  chief  work  of  money 
and  credit  is  done  in,  and  because  of,  "transition  periods." 
Assume  a  normal  equilibrium  accomplished,  and  you  have 
little  trading  left  to  do.     It  will  still  be  necessary,  if  you 
have  the  division  of  labor,  and  private  enterprise,  for  goods 
to  pass  through  as  many  different  hands  as  there  are  dilTer- 
ent  independent  enterprisers  in  the  stages  of  production, 
and  on,  through  merchants,  to  the  consumer.     It  will  still 
be  necessary  to  pay  wages,  rents,  dividends  and  interest. 
But  there  will  b.,'  no  selling  of  lands,  of  houses,  of  factories, 
of  railroads,  or  of  securities  representing  these.     By  hypoth- 
esis these  are  already  in  thr  hands  best  qualified  to  hold 
them.     The  " static  equilibrium  "  presents  "mobility  with- 
out motion,  fluidity  without  flow."  '     The  static  picture 

'Cf.  J    H.  (lark.  DistrihiitwH  of  IIV,,///,,  passim,  and    [.  Sthumpetcr 
Ihcoru-  dcr  u,rtsd,ajmin-n  linlukkh,,,^,  pp.  .i-,oi.     See  also  the  present 


i-   ^     i 


TRADE  AND   SPFXULATION 


26q 


is  a  picture  of  completed  adjustment,  where  no  one  has  an 
incentive  to  change  his  work,  or  his  investments,  because 
he  has  already  done  the  best  that  he  can  for  himself.  It 
is,  therefore,  a  picture  of  a  situation  where  there  is  little 
incentive  for  those  exchanges  which  make  up  the  great 
bulk  of  the  volume  of  trade  in  real  life. 

Hence  the  curious  phenomenon  that  very  much  of  static 
theory  has  been  developed  in  abstraction  from  money  and 
credit.     Mill's  theory  of  international  values,  for  example, 


abstracts   from   money.    "Since  all   trade 


IS  m 


reality 


barter,  money  being  a  mere  instrument  for  exchanging 
things  against  one  another,  we  will,  for  simplicity,  begin 
by  supposing  the  international  trade  to  be  in  form,  what  it 
is  in  reality,  an  actual  trucking  of  one  commodity  against 
another.  So  far  as  we  have  hitherto  proceeded,  we  have 
found  the  laws  of  interchange  to  be  essentially  the  same, 
whether  money  is  used  or  not;  money  never  governing,  but 
always  obeying,  those  general  laws."  '  Other  writers 
have  similarly  held  that  money  is  a  mere  cloak,  covering 
up  the  reality  of  the  economic  process.  Schumpeter,  for 
example,  holds  that  money  is ,  in  the  static  analysis,  merely 
a  "Schleier,"  and  that  "man  nichts  WesentHches  iiber- 
sicht,  weim  man  da  von  abstrahiert."  ^    On  Ute  static  as- 

writer's  "Schumpeter's  Dynamic  Economics,"  Pol.  .SV/.  Quart.,  Dec,  igi.s, 
and  A.  S.  Johnson,  in  Qtiarl.  Jour,  of  Econ.,  May,  1914. 

'  Principles,  Bk.  Ill,  ch.  xviii,  par.  i. 

^  Thcoric  der  virtschafllicheit  Entwickliiiig,  p.  77.  Since  the  foregoing  was 
written,  Professor  \V.  C.  Mitchell  has  presented  an  admirable  historical 
paper  on  "The  R61e  of  Money  in  Kconomic  Theory,"  in  which  he  has  multi- 
plied instances,  in  the  history  of  the  science,  of  this  contempt  for  money, 
or  abstraction  from  money,  in  econop^.ic  theory.  He  finds  that  Marshall, 
and  some  other  later  writers,  have  given  much  fuller  recognition  to  the  i*le 
of  money,  which  he  conceives  of  primarily  as  an  institution  which  has  ra- 
tionalized economic  behavior,  by  forcing  upon  the  individual  book-keeping 
habits  of  thought.  This  still  leaves  it  legitimate  to  abstract  from  money, 
however,  for  "  pure  theory."  Highly  imjwrtant  as  is  the  "  measure  of  values" 
function,  it  docs  not  explain  the  main  work  which  money,  as  money,  ac- 
tually does  in  economic  life,  nor  need  it  be  a  source  of  \alue  for  money.    C/., 


266 


THE   VALUE   OF  MONEY 


"   a 


I!  ! 


sumptions,  of  the  fluid  market,  with  friction,  etc.,  banished, 
money  is,  indeed,  anomalous  and  inexplicable.     It  is  a 
cloak,    a   complication,    a   vexatious    "epi-phenomenon." 
There  is  nothing  for  it  to  do.  and  there  can  be,  conse- 
quently, no  "functional  theory"  developed  for  it.     Static 
theory  may  be  ungracious  in  ignorin"  its  own  foundation. 
But  static  theory  is  grotesque  when  it    -eks  to  support  its 
own  foundation!    Static  theory  is  possible  only  on  the 
assumption  that  the  work  of  money  and  credit  has  been 
done.     What,  then,  shall  we  say  of  static  theory  which 
seeks  to  explain  the  work  of  money  and  credit?    Yet  pre- 
cisely this  is  what  is  undertaken  by  the  quantity  theory, 
with  its  "normal"  or  "static"  laws  of  money  and  credit.' 
A  functional  theory  of  money  and  credit  must  be  a  dynamic 
theory.     To  talk  about  the  laws  of  money,  "after  the 
transition  is  completed"  is  to  talk  about  the  work  money 
will  do  after  it  has  finished  working.     For  a  functional 
theory  of  money  and  credit,  we  must  study  the  obstacles 
that  exist  to  prevent  the  fluid  market.    We  must  study 
friction,  transitions,  dynamic  phenomena. 

To  this  problem  we  shall  come  in  Part  III.  For  the 
present,  I  am  content  to  have  disproved  the  quantity 
theory  contention  that  the  volume  of  trade  is  independent 
of  the  quantity  of  money  and  credit. 

infra,  our  chaF)ter  on  "TIh-  Functions  of  Money."  Professor  Mitchell's 
paper  will  be  founii  m  "  Paper  an.l  I'roceedings,"  Supplement  to  the  March, 
igib,  number  of  the  Am.  Ecoii.  Rn.  ' 


+  • 


APPENDIX  TO  CHAPTER  XIII 

THE    RELATION    OF    FOREIGN    TO     DOMESTIC 
TRADE  IN  THE  UNITED  STATES ' 

The  word,  "trade,"  as  used  in  connection  with  statistics 
of  foreign  and  domestic  trade  has  been  irritatingly  am- 
biguous.   Few  writers,  in  speaking  of  domestic  trade,  have 
meant  the  same  thing  by  trade  that  they  have  meant  by 
the  word  when  speaking  of  foreign  trade,  and  hence  we 
have  had  many  pointless  efforts  to  institute  comparisons 
between  the  two,  and  some  very  misleading  statements 
about  the  matter.    Thus,  figures  have  been  ofTered  which 
would  show  that  the  foreign  trade  of  the  United  States 
is  only  a  fraction  of  i%  of  the  domestic  trade.    This  con- 
clusion is  reached  by  taking  the  figures  for  banking  trans- 
actions discussed  in  Chapters  XIII  and  XIX  as  repre- 
sentative of  domestic  trade,  and  comparing  them  with  the 
annual  figures  for  exports  and  imports.    This  procedure 
is  fallacious  for  several  reasons:  ^  the  figures  thus  reached 
for  domestic  trade  exceed  even  the  total  trading  within  the 
country,  as  shown  in  Chapter  XIX.     In  the  second  place, 
as  shown  in  Chapter  XIII,  the  bulk  even  of  these  deposits 
which  do  represent  real  trading  grow  chiefly  out  of  specula- 
tion.   Even  in  ordinary  trade,  goods  are  counted  several 
times  before  reaching  the  final  consumer.     It  is  clear, 
therefore,  that  even  an  accurate  figure  for  total  trading 
within  the  country  would  have  little  relevance  when  we 

'  The  materials  in  this  apjxjndLx  are  taken  from  an  article  published  ir 
the  Annalist  of  Jan.  8, 1017,  pp.  39,  .si-?;4.  and  the  New  York  Times  Annua! 
Financial  Review  of  Dec.  31,  1916,  and  are  reprinted  by  the  courtesy  of  the 
New  York  Times  Company. 

2  Vide  Annalist,  Feb.  7,  1916,  pp.  183-184,  and  Feb.  21,  1916,  p.  246. 

367 


268 


Tin:    VALLE   OF   MONEY 


m 


in 


1 1 


I 


arc  seeking  a  figure  to  compare  with  exports  and  imports. 
Nor,  if  a  comparison  of  the  actual  trading  in  which  for- 
eigners participate  with  the  trading  exclusively  between 
Americans  is  sought,  can  we  take  the  export  and  import 
figures  as  representative  of  the  foreign  trading— they  do 
not  include  a  multitude  of  highly  important  transacdons 
in  which  foreigners  participate.  Very  much  of  the  busi- 
ness of  the  New  York  Cotton  Exchange,  the  New  York 
Stock  Exchange,  the  Chicago  Board  of  Trade,  and  other 
speculative  markets  represents  foreign  buying  and  selling, 
especially  arbitraging  transactions,  and  the  other  "invisible 
items"  of  foreign  trade  need  merely  to  be  mentioned  for 
the  economist  to  recognize  the  fallacy  of  a  comparison 
which  omits  them. 

What  figures  are  relevant  when  we  wish  to  compare 
foreign  and  domestic  trade?    First  we  must  make  clear 
the  purpose  for  which  the  comparison  is  to  be  made.     If 
we  are  concerned  with  the  calls  made  by  foreign  and  do- 
mestic trade  on  the  money  market,  we  should  make  use  of 
a  different  method  of  comparison  than  that  which  will  be 
here  employed.     The  purpose  of  the  comparison  here  un- 
dertaken is  to  determine  how  much  of  our  American  labor, 
land  and  capital  is  at  work  producing  for  the  foreign  con- 
sumer, as  compared  with  the  land,  labor  and  capital  in 
America   producing    for    the   American    consumer.    The 
comparison  here  undertaken  is  concerned  with  the  ques- 
tion which  is  usually  uppermost  in  the  minds  of  those  who 
undertake  such  a  comparison,  namely,  Jurw  mpurtant  is 
our^  foreign  market  to  us?    Obviously,  for  such  a  com- 
parison as  this,  we  should  not  count  a  gi\'en  case  of  eggs 
twelve  times  merely  because  it  changed  ownership  twelve 
times  in  getting  from  farm  to  breakfast  table.     Items  of 
export  and  import  count  only  once  in  the  figures  for  export 
and  import.    We  must  find  a  figure  for  domestic  "trade" 


THE  RELATION  OF  FOREIGN  TO  DOMESTIC  TRADE      269 

in  which  items  count  only  once,  allowing  no  turnovers  of 
the  same  goods  to  swell  the  total,  if  we  wish  to  make  our 
figures  comparable. 

The  method  proposed  for  making  this  comparison,  for  a 
long  series  of  years,  is  a  modification  of  the  method  used 
by  the  writer  in  an  article  in  the  Annalist  of  Feb.  7, 
1916.    A  figure  based  on  the  bank  deposits  of  retail  mer- 
chants in  Kinley's  1909  investigation  was  there  taken  as 
properiy  comparable  with  the  export  and  import  figures. 
The  final  sale  to  consumer  by  retailer  is  "  the  one  far  off 
divine  event"  toward  which  the  whole  productive  process 
moves.    Everything  else  in  production  and  exchange  looks 
forward  to  this.    Ultimately,   from   the  demand  of  the 
final   consumer  comes  all   the  demand   that  is  directed 
toward  the  agencies  of  production,  even  though  the  laborer 
sees  his  immediate  market  in  the  person  of  the  employer, 
and  the  capitalist  or  landlord  sees  his  immediate  market 
in  the  person  of  the  active  business  man.    The  figure 
reached  for  retail  trade  by  the  method  then  employed  was 
$34,500,000,000  for  1909.     This  figure  was  too  high,  as 
shown  in  Chapter  XIII  above,  and  the  figure  reached  now 
for  retail  deposits  by  the  same  method  is  $32,000,000,000. 
Even  this  figure  is  too  high,  however,  as  I  there  concluded, 
to  represent  retail  trade,  and  I  shall  use  it  only  as  a  check 
on  King's  figure  for  the  total  income  0/  the  United  States  in 
1910,  which  I  shall  use  as  a  base  figure  instead  of  my  own. 
King's  figure  for  the  total  income  of  the  United  States  in 
1910  is  $30,500,000,000.1    I  take  this  figure  as  including 
all  that  the  American  people  spend  for  consumption,  with 
retailers,  physicians,  hotels,  theatres,  etc.,  and  also  their 
net  savings  for  the  year.    Part  of  this  they  spent  for  foreign 
products.    The  rest  they  spent  at  home.    This  residue 
spent  at  home  gives  us  a  figure  which  we  may  properiy 

»  Wealth  and  Income  of  the  People  of  the  United  States,  p.  129. 


270 


TIIE   VALiri:   OF   MONEY 


■     1 


1 


compare  with  the  amount  the  foreigner  spends  in  America, 
as  indicating  the  ratio  of  foreign  to  domestic  trade  for  the 
purijose  in  hand.  We  subtract,  in  other  words,  from  the 
figure  for  total  income  the  figure  for  imports.  Then  we 
compare  the  residue  with  the  figure  for  exports,  and  get 
our  ratio  of  foreign  to  domestic  trade.  The  export  and 
import  figures  must  first,  however,  be  reduced  to  a  retail 
basis.  That  is,  assuming  that  wholesale  i)rices  are  two- 
thirds  of  retail  i)rices,  we  add  50' ,',  to  the  figures  for  exports 
and  imports  (which  are  wholesale  figures)  before  making 
the  subtraction  and  the  comparison.  The  ultimate  con- 
sumer, both  in  Europe  and  America,  pays  for  imports  and 
exports  on  a  retail  basis.'  This  method,  applied  to  the 
figures  for  1910,  gives  us  a  ratio  of  about  10:1  for  domestic 
to  foreign  trade- -the  lowest  percentage  for  foreign  trade 
which  we  shall  find  for  any  year  in  the  period  investigated, 
1890-1916. 

This  comparison  is  still  unfavorable  to  foreign  trade. 
Domestic  trade,  in  our  figures,  includes  savings  and  invest- 
ments, including  investments  made  by  Americans  abroad. 
Import  figures  are  marred  by  undervaluations,  exports  are 
not  all  counted,  and  the  figures  for  exports  and  imports 
do  not  include  foreign  investments  in  America.  American 
investments  abroad  should  not  be  counted  as  part  of  do- 
mestic trade.  Moreover,  our  figures  take  no  account  of 
travellers'  expenditures,  or  of  services  performed  by  pro- 
fessional men  of  one  country  for  men  in  another,  or  of  cer- 
tain other  "invisible  items."  But  while  this  makes  our 
percentage  for  foreign  trade  too  low  for  all  years,  it  probably 
does  not  greatly  upset  the  results  for  yearly  variations  in 
the  ratio  except  for  the  year  1916,  when  the  figure  for  do- 
mestic trade  is  left  decidedly  too  high,  and  the  ratio  for 

'  The  justification  of  this  procedure  is  argued  more  fully  in  my  article 
in  the  Annalist  of  Feb.  7,  1916,  iboxe  referred  to. 


THE   RELATION  OF  FOREIGN  TO  DOMESTIC  TRADE      27 1 

foreign    trade   is    too   low,  as   compared  with  previous 
years. 

For  years  other  than  19 10,  indirect  calculations  must  be 
resorted  to  for  domesUc  trade.    I  have  substantial  confi- 
dence in  the  rough  accuracy  of  the  figure  chosen  for  iqio 
in  view  of  the  convergence  of  two  widely  different  sets  of 
data.    My  figure  for  retail  deposits  in  1909  is  $32,ooo.cx»,- 
000.    King's  figure  for  total  income  is  $30,500,000,000  for 
1910.    King's  figure  seems  to  me  a  better  figure  to  use  for 
the  purpose  in  hand.     I  use  my  own  merely  as  a  rough 
check  on  his.     For  years  other  than  1910,  the  figure  for 
net  income  is  calculated  as  a  percentage  of  King's  figure 
for  1910,  by  means  of  an  "index  of  variation."    It  is 
assumed  that  the  net  income  of  1905,  for  example,  bears 
the  same  relation  to  the  index  for  1905  that  the  absolute 
figure  for  net  income  of  1910  bears  to  the  index  for  1910, 
and  net  income  for  1905  is  then  computed  by  "the  rule  of 
thre^"    The  index  of  variation  chosen  is  railway  gross  re- 
ceipts weighted  by  wholesale  prices.    I  think  that  railway 
gross  receipts  are,  on  the  whole,  the  most  dependable  and 
easily  manageable  index  of  physical  volume  of  production 
that  we  have,  though  recognizing  difficulties,  later  to  be 
discussed,  in  using  them  for  the  purpose  in  hand.     Rail- 
roads touch  virtually  every  kind  of  business  in  the  country. 
Variations  in  the  pecuniary  volume  of  production  and  con- 
sumption, however,  if  due  to  rising  or  falling  prices,  rather 
than  to  changing  physical  volume,  would  not  be  indicated 
by  changes  in  railway  gross  receipts.    The  same  volume 
of  transportation  might  represent  widely  varying  pecuniary 
values  of  goods  transported.    Railway  rates  do  not  vary 
from  year  to  year  with  prices  of  goods,  even  though  high- 
priced  goods  are  normally  charged  higher  rates  than  low- 
priced  goods.    The  index,  therefore,  must  include  prices  as 
well  as  physical  volume   of   transportation.    For   1910, 


372 


THE   VALrr   f)F  MONEY 


!   i 
i 


l|; 


therefore,  railway  i^rosA  receipts  and  an  index  of  prices  are 
multiplied  tojLjether.  and  counted  as  ioo%.  The  same 
thinjj  is  done  for  railway  gross  receipts  and  prices  for  other 
years,  and  the  results  reduced  to  percentages  of  the  result  for 
1 910.  The  figure  for  net  income  in  any  other  year  is  then 
readily  computed  as  a  percentage  of  the  figure  for  igio. 
The  results,  for  the  years  1890- 191 6,  appear  in  the  tables 
below.' 

'  Tlie  figures  fwr  railway  rtoss  receipts  are  taken  from  the  Commirn'iil 
aiiJ  Fiiidiuitil  Chronith;  rather  than  from  (Jovcrnment  re|M)rts,  in  order  tii 
Ket  figures  for  i  alen<lar  ratlier  than  fiscal  jears,  ant!  in  order  to  net  the  latest 
|K)s.sil)le  tiRures.  As  the  aljsolute  figures  are  not  strictly  <  omparable  throu^h- 
oiit,  the  methiKl  employed  has  been  to  calculate  ptrcruUi^i-  Rains  or  losses 
for  the  sanif  roads  for  suicessi\e  years.  This  would  lead  to  a  cumulati\e 
error,  if  lar^e  new  roads  had  lieen  built  during  the  jx-ricxl,  and  had  retained 
their  inde|>en(ience.  In  |K)int  of  fact,  however,  the  curves  for  the  absolute 
tiKures  and  for  the  i)ercentaKe  changes  run  pretty  closely  parallel  down  to 
moq,  at  which  lime  a  lar^e  number  of  small  roa<ls,  not  previously  counted, 
are  brought  into  the  tifiures.  As  the  number  of  roatis  reiwrted  varies,  the 
percen'a','e  changes  on  the  siime  roads  give  us  the  more  accurate  measure  of 
year  b>  year  variation.  It  is,  at  the  date  of  writing  (December,  1916),  the 
only  |K)ssible  meth(xl  for  igi6,  since  the  Chronkle  figures  which  come  to 
the  end  of  November  are  based  on  only  37  roads,  with  a  mileage  of  84,452 
out  of  over  240,000  miles  usually  reix)rte(l.  For  these  roads,  a  gain  of 
JO'mVc.  for  the  first  eleven  months  of  igif)  over  the  sjime  months  in  1915, 
is  re|)orted,  and  our  figures  for  igi6  rest  on  the  as.sumption  that  the  gain 
for  the  whole  year  over  igij  is  17. 27'^  (The  greatest  gains  are  for  the 
earlier  months,  as  the  end  of  1915  was  h  |)eri(Kl  of  great  activity.)  Much 
fuller  figures  supplied  me  b>'  Mr.  Osmund  Phillips,  of  the  AVu'  York  Timis, 
for  the  first  kii  months  of  1915  and  igi6  serve  to  justify  this  estimate  for 
the  gain  of  igiO  over  igis.  For  the  Cliroiiiilc  data,  see  vol.  102,  [).  930, 
vol.  103,  p.  2112,  and  passim. 

The  inde.x  of  prices  chosen  is  Dun's.  (Sec  es{)ccially  Dun's  Rnim-  of 
May  II,  igo7,  Jan.  g,  igi.s,  and  later  months,  ami  the  discussion  of  Dun's in- 
licv  number  in  the  liulletiu  of  tlir  I'liiUd  Sinks  Bureau  of  Labor  Statistics, 
Whole  Numl)er  173,  July,  1915,  pp.  148  </ .«•(/.)  Dun's  index  number  is  chosen 
partly  because  it  is  complete  for  1916,  and  partly  because  it  is  weighted 
in  accordance  with  the  consumption  of  diflerent  classes  of  gootis,  and  so 
particularly  suited  to  this  inquiry.  I  venture  to  express  strong  preference 
for  rationally  weighted  index  numbers,  and  for  the  use  of  different  index 
numbers  for  different  purposes.  (Vide,  the  di.scussion  of  index  numbers  in 
ch.  ig.)  Our  price  index  for  each  year  is  an  average  of  the  twehe  monthly 
figures  given  by  Dun  from  1894  to  1916.  lor  the  years  iSgo-94,  "ur 
price  index  is  an  a\erage  of  the  figures  for  January  and  July.  This  average 
is  lower,  in  most  years,  than  the  average  for  the  whole  year,  and  may  well 


THE   RELATION  OF  FOREIGN  TO  DOMESTIC  TRADE      27.^ 

It  may  be  noticed  that  my  figures  for  net  income  in  iqoo 
and  1890  do  not  correspond  very  closely    /ith  the  figures 
for  the  same  years  as  independently  estimated  by  King. 
My  figure  for  1900  is  $12,900,000,000,  where  his  is  $17,965,- 
000.000;  for  1890,  my  figure  is  $9,300,000,000,  where  his  is 
$12,082,000,000.     I  am  inclined  to  the  view  that  the  figures 
in  my  tables  come  closer  to  the  facts  for  these  years  than 
do  his  figures,  assuming  that  his  figure  for  1910  is  correct. 
It  will  be  noticed  that  on  his  figures  there  was  an  in- 
crease of  about  50*^^  from  1890  to  1900,  and  an  increase 
of  only  about  td'l  in  the  decade  following.    This  seems 
to  be  an  unlikely  relation.    One  would  expect  a  much 
greater   rate   of    increase    for    the   decade    1900-10,    as 
compared  with  the  preceding  decade,  than  King's  figures 
show.     The  period  from  1890  to  1900  included  the  terrible 
panic  of  1893  and  the  prolonged  depression  ensuing.    The 
panic  in  t^,  7  was  trifling  in  comparison,  and  recovery,  as 
shown  b^       •  index  numbers  in  the  tables  below,  was  very 
much    quiv-.ier.     Moreover,    falling    prices    characterized 
much  of  the  earlier  decade.    The  highest  prices  of  the 
whole  ten  years  were  in  1891.    The  period  from  1900  to 
1 910  is  a  period  of  rapidly  rising  prices,  on  the  whole.    On 
the  basis  of  our  general  knowledge  of  the  two  periods,  one 
would  expect  a  greater  percentage  gain  by  far  for  the  second 
decade,  and  I  therefore  trust  the  results  of  the  index  of 
variation  here  chosen,  which  show  that.    Similar  results 
are  obtained  by  applying  to  the  base  figure  for  1910  an 

be  lower  than  the  average  for  these  years,  but  no  attempt  has  been  made 
to  rectify  this  |K)ssible  source  of  error.  The  index  is  recalculated  from  Dun's 
figures  (where  it  is  not  u  iiercentage.  but  a  sum  of  prices),  am!  made  a  true 
(Krccntagc  index,  with  a  base  in  1910. 

The  figures  for  exports  and  im|Kirts  are  for  calnidnr  years.    They  were 
obtaine<l,  for  the  years  iSgo-ipcx),  from  Stiitislin  nf  tin-  rnikd  SMcs.  1S67 
iqag   (National  Monetary  Commission  KeiK)rt),  and,  for  the  vears  sime 
iQog  from  the  Commercial  and  Financial  Chronicle.    For  1916,  November 
and  December  are  estimated. 


274 


THE   VALUE   OF   MONEY 


;!i . 


(i 


I  • 


index  of  variation  dcrivt-d  from  Kemmert'r's  and  Fisher's 
fiKurcH  for  tradi-  '  and  prices.  My  figure  for  i8»)o  may, 
moreover,  he  checked  by  comparison  with  the  figure  given 
l)y  ('.  B.  Spahr  in  The  Present  Distribution  of  Wealth  in  tfie 
United  States  (p  105)  for  the  net  income  of  the  country  for 
that  year:  Si 0,800,000,000.  It  may  be  that  my  figure  for 
1800  is  too  low,  but  I  have  not  sought  to  "(h)ctor"  it  by  an 
arbitrary  "correction  factor"  to  make  it  corresjKJnd  more 
closely  than  it  (h)es  with  the  other  estimates.  It  is  striking 
enough  that  a  figure  derived  from  an  inde.x  of  variation, 
twenty  years  away  from  its  base,  should  come  as  close  as 
this  to  figures  calculated  from  wholly  different  data. 

One  brief  comment  may  be  made  on  the  significance  of 
these  figures.  It  may  be  questioned  if  figures  showing  the 
proportions  of  our  industry  devoted  to  supplying  go*  ?s 
for  the  foreign  market  correctly  indicate  the  importar  i 
of  the  foreign  market  to  us.  It  may  be  urged  that  if  we 
should  lose  our  foreign  market,  we  should  merely  turn  to 
producing  more  for  the  domestic  market,  and  that  the  loss 
would  not  be  the  whole  of  our  receipts  from  foreign  trade, 
but  merely  the  cost  of  transition,  and  the  loss  that  comes 
from  shifting  to  production  to  which  we  are  less  suited. 
This  is,  doubtless,  true.  But  the  lo.ss  reckoned  this  way 
may  well  be  greater  than  the  loss  reckoned  on  the  basis  of 
my  figures!  It  is  equally  true,  moreover,  that  our  domestic 
trade  is  not  important  to  the  extent  indicated  by  my 
figures,  since  if  we  luse  part  of  our  domestic  trade,  our  pro- 
ducers will  turn  to  supplying  more  for  the  foreign  market. 
But  one  must  not  regard  the  cost  of  transition  as  a  negli- 
gible matter!  The  cost  may  easily  be  prolonged  depression. 
Certain  parts  of  our  foreign  trade  are  really  vital  to  us,  both 

I  Their  inHicw  «f  vnriiitiMn  for  "tnuie,"  thou;;!!  hitUni;  to  meet  the  prob- 
lems for  which  they  were  (lesiRiecl,  as  shown  in  chs.  13  and  19,  are  good 
indicia  of  variation  for  physical  i)roduction  and  consumption. 


I    . 


THK   RELATIO>f  OF   FOREIGN  T(J  WJMESTK'  TRADE      275 

on  the  lm{M)rt  and  (to  a  less  degree)  on  the  export  side. 
The  most  imi>ortant  practical  use  to  which  the  figures  here 
given  may  be  put  are  in  connection  with  short-run  prob- 
lems. Foreign  trade  is  so  important  to  us  that  any  .sudden 
alteration  in  its  amount  may  bring  great  adversity  or  great 
prospirity  -as  the  course  of  the  present  War  abundantly 
testilies.' 

An  application  of  our  method  to  the  years  1850  and  i860 
gives  a  percentage  for  foreign  trade  of  12.7  in  1850,  and  16.0 
in  1860.- 

Certain  other  cautions  are  needed  in  presenting  these 
figures.  For  one  thing,  variations  in  railway  rates  will 
make  a  given  volume  of  gross  earnings  mean  different 
things  in  different  years  as  to  the  physical  volume  of  traffic. 
In  the  writer's  opinion,  which  is  confirmed  by  Professor 
VV.  Z.  Xipley,  there  is  no  possible  way  of  making  allowance 
for  this,  as  the  cross-currents  affecting  railway  rates  are 
altogether  too  numerous  and  obscure.  Nor  has  any  effort 
been  made  to  allow  for  variations  in  the  proportions  of 
freight  and  passenger  receipts,  or  of  different  classes  of 
freight  traffic. 

Again,  the  proportions  of  railway  traffic  connected  with 
foreign  trade  may  vary  greatly,  and  it  may  happen  that  a 
big  increase  in  railway  gross  receipts  is  due  to  increasing 
foreign  trade,  primarily.  There  is  reason  to  suppose  that 
much  of  the  increase  of  1916  is  to  be  explained  that  way. 
This  makes  our  comparison  for  1916  particulariy  adverse 
to  foreign  trade,  since  we  count  as  domestic  trade  what  is 
really  foreign  trade.     The  figures,  ho>vever,  are  presented 

'That  this  should  have  been  seriously  denied  during  the  recent  Presiden- 
tial campaign  on  the  basis  of  the  estimate  that  foreign  trade  is  minute  as 
compared  with  domestic  trade,  gives  si>ecial  point  to  the  present  disr„ssion 

'  King  s  ligures,  for  which  he  estimates  a  margin  of  error  of  2c%  are 
used  for  these  jxars.  {Loc.  cU.,  p.  129.)  The  export  and  import  figures 
used  are  for  fiscal  years.  "^uics 


276 


THE   VALUK   OF   MONEY 


as  they  stand.  Moreover,  for  1916,  the  great  increase  in 
foreign  trade  is  in  exports.  Merchandise  imports  are  not 
much  greater  than  in  previous  years."  Our  exports  have 
been  chiefly  paid  for  by  "invisible  items,"  gold  and  se- 
curities, and  short  term  credits.  These  do  not  appear 
anywhere  in  our  figures.  A  substantial  source  of  error 
appears  from  this  cause  iu  our  igi6  figure.  I  should  think 
it  safe  to  put  the  i.itio  for  foreign  trade  to  domestic  trade 
for  1 916  at  above  20^0  instead  of  the  17.9%  our  table 
shows. 

The  reader  will  wish  to  know  for  a  given  year  how  much 
of  the  increase  or  decrease  is  due  to  physical  growth  of 
business,  as  represented  by  railway  gross  receipts,  and  how 
much  is  due  to  changes  in  prices.  To  give  this  informa- 
tion, and  to  make  it  easy  for  a  critic  to  check  the  results, 
a  table  showing  the  index  numbers  from  which  the  figures 
for  net  income  are  computed  is  subjoined. - 

'  I'robably  the  apparent  moderate  increase  in  imports  is  due  wholly  to 
higher  prices.  The  actual  physical  volume  has  i)ossibly  been  reduced,  as 
lompared  with  the  periotl  before  the  War. 

-  I  am  indebted  to  several  colleagues  for  advice  and  criticism  in  connec- 
tion with  these  tables,  particularly  Professors  Taussig  and  W.  M.  Persons. 
.Mr.  N.  J.  Silberling  has  been  particularly  helpful,  aiding  in  the  choice  of 
the  statistical  sources,  suggesting  methods  of  handling  and  interpreting 
them,  and  making  virtually  all  the  computations  in  the  tables. 


" 


*)■  ■ 


THE  RELATION  OF  FOREIGN  TO  DOMESTIC  TRADE   277 


TABLE  I  > 


Calcnilir        Net  Income  of  ihc 
Years  United  States 


iSqo  ..  S  9,300,000,000. 

l8gi....  10,400,000,000 

IiSq2....  10,000,000,000. 

i8q3  ...  10,100,000,000 

1804...  8,300,000,000 

i8g5....  8,400,000,000. 

iSyf).  .  .  .  7,900,000,000. 

1897...  8,000,000,000. 

1898....  9,100,000,000. 

1899...  10,900,000,000 

1900  ..  .  12,900,000,000. 

igoi ....  14,600,000,000. 

IQ02  .  .  .  15,600,000,000 

1903  ..  .  17,700,000,000 

1904...  18,000,000,000. 

1905.  ..  19,600,000,000. 

1906....  21,500,000,000 

1907...  26,600,000,000. 

1908...  23,000,000,000. 

1909....  27,600,000,000. 

1910...  30,500,000,000 

1911...  29,600,000,000 

1912...  33,800,000,000. 

1913  •  •  •  34,800,000,000. 

1914....  32,600,000,000. 

19 '3 35,;oo,ooo,ooo. 

1916....  49,200,000,000. 


DomciliV  Trade  of 
Uniteil    Slates  ^ 
Net    Income   minus 
Imports   at    Retail 
Prices 

$  8,100,000,000.  .  . 

9,200,000,000.  .  . 

8,700,000,000.  .  . 

8,900,000,000.  .  . 

7,300,000,000.  .  . 

7,200,000,000.     . 

6,900,000,000.  .  . 

6,900,000,000    .  . 

8,200,000,000    .  . 

9,700,000,000  . 
11,700,000,000.  . 
13.300,000,000  . 
14,200,000,000.  .  . 
1 6, 200,00c  ,000.  .  . 
i6,500,ooo,oof>  .  . 
17,800,000,000.  .  . 
19,500,000,000.  .  . 
24,500,000,000.  .  . 
21,300,000,000.  .  . 
25,400,000,000.  .  . 
28,200,000,000  .  . 
27,300,000,000.  .  . 
31,100,000,000.  .  . 
32,100,000,000.  .  . 
29,900,000,000.  .  . 
32,700,000,000.  .  . 
45,800,000,000.  .  . 


ForeiRn  Trade  of 
Uniteil  States  « 
Exports  at  Retail 
Prices 


$1,300,000,000. 

1 ,400,000,000 . 

1 ,400,000,000 

1,300,000,000 

1,200,000,000 

1,200,000,000.  , 

1,500,000,000. 

1.600,000,000. 

1 ,900,000,000 . 

1 ,900,000,000 . 

2,200,000,000. 

2,200,000,000. 

2,000,000,000. 

2,200,000,000. 

2,200,000,000.  . 

2,400,000,000.  , 

2,700,000,000.  . 

2,900,000,000.  . 

2,600,000,000.  . 

2,600,000,000.  . 

2,800,000,000.  . 
3,100,000,000.  . 
3,600,000,000.  . 
3,700,000,000.  . 
3,200,000,000.  . 
5,300,000,000.  . 
8,200,000,000.  . 


4 

Ratio 
of     For- 
eign    to 
Uom 
estic 
Trade 

16    I'c 

15    •2% 
16.1% 

14.6% 

16. 5% 


23.2% 

23 -2% 

19  6% 

18.8% 

16.  S% 
14- 1  % 
13  6% 
13-3% 
I3S'X 
13  8% 
11.8% 
12.2% 
10.2% 
9  9% 


11.6% 
11.5% 
10.7% 
16.4% 


to  the 


'  Retail  prices  of  exports  and  imports  are  obtained  by  adding  50% 
wholesale  figures  reiwrted,  on  the  assumption  that  wholesale  prices  are 
two-thirds  of  retail  prices.  The  percentages  in  the  final  column  are  obtained 
by  dividing  the  figures  for  foreign  trade  by  the  figures  for  domestic  trade. 
The  percentage  would  reach  100  when  foreign  trade  becomes  equal  to 
domestic  trade. 


II 


■*  I 


Im 


278 


T/bLE  11. 


Calendar 


1890. . 
1891. . 
1892. . 

1893-. 
1894. • 

1895.. 
1896. . 

1897.. 
1898.. 
1899. . 
1900.  . 
1901 . . 
1902. . 

1903 ■ ■ 
1904. . 

1905 .  . 

1906.  . 
1907 . . 

1908.  . 

1909.  . 
I9IO. . 

1911 .  . 

1912.  . 

1913-  • 
1914.. 

1915- • 
1916.  . 


THE  VALUE  OF  MONEY 


INDEX  NUMBERS  FROM  WHICn  THE  FIGURES  FOR 
NET  INCOxME  ARE  DERIVED 


Dun's    Prices 
with   base 
in   igio 


R.  R.  Gross 
Receipts,  re- 
duced to  base 
of  lyio 


76 
.    81 

75 

77 

71 

68.0 

63.8 

62.  2 

66.4 

72-3 

78 

80 

84 

83 

84 

84 

88 

94 
92 

99 


4 
45-1 
49  6 
S40 

59-4 
62.6 
70.1 

70.3 
76.4 
850 
92.9 
81.8 
91.7 


.  100.00 100.00 

.  98  I    

•  104 .1   106 . 9 

•loi  7   112. 5 

■102.5   104.5 

■  106.0   IIO.O 


3 

Composite 
Index,  R.  R.  Or. 
Rets,  multiplied 
by  Prices.  (Col- 
umn  I  X  column 
2.) 


39  8  30.8. 

42.0  34.2. 

43-5  32.8. 

42.9  33  2. 

38.1  27.2. 

40.7  27.8. 

40.6  25.9. 

42.4  26.4. 

20  9 . 
...   35.8. 

42.1. 

....  47.8. 
....   51.3 
....   58.2. 

59.0. 

....   64 . 2 . 

70.5. 

....  86.3. 
....  75.6. 
....  91.0. 

lOO.O .  . 

99  o  97.0.  , 


. III.O. 

.114.0 
. 107.0. 
. 116.0. 


12:; 


■  129.0 161. 2. 


Net  Income '  ot 
the     United 
States    in   bil- 
lions of  dollars: 
ioo:jo.5::  (3)at 

.$9.3  billions 

.   10.4 

.   10. o 

.  10. 1 

.     8.3 

•     8.4 

.     7-9 

.     8.0 

.     9.1 

.   10.9 

.   12.9 

.   14.6 

■   IS  6 

17.7 

18.0 

19.6 

21.5 

26.6 

23  o 

27.6 

30.5 

29.6 

33  8 
34.8 
32.6 

35-4 
49.2 


The  fiRures  m  column  4  are  obtairtcd  for  any  year,  say  1905,  by  takinc 
the  index  in  column  3  for  1905,  the  index  in  column  3  for  1910,  ind  the 
absolute  figure  in  column  4  for  1910,  and  solving  by  the  "rule  of  thi-e  " 


Ml 


CHAPTER  XIV 

THE  VOLUME  OF  TRADE  AND  THE  VOLUME  OF 
MONEY  AND  CREDIT 

In  the  argument  so  far  I  have  said  nothing  of  the  reverse 
relationship,  the  dependence  of  the  volume  of  money  and 
the  volume  of  credit  on  trade.  The  two  are  indeed  inter- 
dependent. Interdependence  suggests  circular  theory, 
and  ic  often  a  phrase  to  cover  circular  reasoning.'  In  the 
case  of  the  relation  under  discussion,  however,  I  have,  I 
trust,  already  abundantly  protected  myself  against  the 
charge  of  circular  reasoning  by  denying  that  either  volume 
of  money  and  credit  on  the  one  hand,  or  volume  of  trade 
on  the  other  hand,  is  a  true  cause  at  all.  Both  are  mere 
abstract  names,  designating  highly  heterogeneous  indi- 
vidual occurrences,  which,  individually  are  cause  or  effect. 
In  general,  both  volume  of  money  and  credit,  on  the  one 
hand,  and  volume  of  trade  on  the  other  hand,  are  results 
of  common  causes,  which  are  the  vera  causa  of  economic 
phenomena — values,  psychological  phenomena.  The  whole 
thing  is  to  be  explained  immediately  and  primarily  in 
terms  of  social  relationships  and  mental  processes, — in 
terms  of  social  values. 

To  show  that  increasing  trade  tends  to  increase  money 
and  credit  is  not  difficult.  If  one  may  venture  a  hypo- 
thetical illustration — and  the  sort  of  hypothetical  illus- 

'  The  notion  of  interdependence  need  not  involve  circular  reasoninR,  if 
the  facts  really  justify  it.  The  whole  cosmos  is,  doubtless,  interdependent. 
Often  certain  systems  within  the  cosmos  manifest  enough  independence  of 
the  rest  of  the  universe  to  justify  us,  for  some  purposes,  in  thinking  only 
of  /H/crrelations  within  the  systems.  The  important  thing  is  to  make  the 
circle  in  theory  as  big  as  the  circle  in  fact.    CJf.  Social  Value,  p.  152,  n. 

2/9 


Hi 


280 


THE   VALUE   OF   MONEY 


trations.  like  the  dodo-bone  case,  of  which  quantity  theo- 
rists are  fond  make  one  hesitate  to  do  so— let  us  assume  a 
communistic  community,  isolated  from  other  markets, 
with  a  developed  system  of  production,  including  an  ex- 
tensive use  of  gold  in  the  arts.  Let  the  communistic  re- 
gime gradually  pass  over  to  an  individualistic  regime.  As- 
sume that  the  inhabitants  are  acquainted  with  the  use  of 
gold  as  money,  and  that  their  government  is  willing  to  coin 
it  freely.  As  individualism  spreads,  and  trade  grows,  will 
not  more  and  more  gold  be  taken  to  the  mints?  I  am  not 
here  concerned  with  the  principles  determining  the  appor- 
tionment of  gold  between  the  money  employment  and  the 
arts.  It  is  enough  to  show  that  expanding  trade  tends 
to  increase  the  volurr-"  of  money. 

Assume  that  the  money  supply  meets  difficulties  in  its 
expansion.  Is  there  not  at  once  an  incentive  to  extend 
credit?  The  seller  finds  his  customers  unwilling  to  buy  for 
cash,  in  amounts  as  great  as  before.  In  order  to  sell  as 
much  as  before  (assuming  that  the  use  of  credit  is  known, 
to  avoid  trouble  with  historical  origins),  he  extends  credit,' 
—which,  when  practiced  generally,  lightens  the  strain  on 
the  money  supply. 

I  have  so  far  said  nothing  of  the  case  where  there  are 
stocks  of  the  money  metal  to  be  got  from  outside  markets. 
But  if  a  country  is  expanding  its  trade,  does  not  money 
come  in?  The  quantity  theorists  would,  indeed,  admit 
this,  in  general,  though  their  reason  is  a  bad  one,  namely: 
that  expanding  trade  lowers  prices,  and  lower  prices  make 
the  market  attractive  to  foreign  buyers,  who  then  send  in 
money  for  the  goods.  I  shall  later  discuss  this  aspect  of 
the  theory.'  For  the  present,  I  merely  interject  the  ques- 
tion as  to  the  probability  of  an  expansion  of  trade  when 
prices  are  falling.    Increasing  slocks  of  particular  goods  may 

'  In  chapter  XVI. 


THE  VOLUME  OF  TRADE.  MONEY  AND  CREDIT   28 1 


well  mean  lowtr  prices  for  these  goods  and  if  they  be 
articles  of  export  the  lower  prices  may  well  increase  the 
export  trade,  and  bring  money  in.  But  this  increase  in 
stocks  of  articles  of  export  is  very  different  from  total  trade 
within  the  country;  and  lower  prices  in  articles  of  export 
are  very  different  from  a  generally  lower  price-level.* 

Will  expanding  trade  in  a  country  increase  credit?  I 
come  here  to  one  of  the  striking  features  of  Fisher's  doc- 
trine— a  feature  in  which  I  think  he  is  fundamentally  true 
to  the  quantity  theory.  He  finds  no  way  in  which  expand- 
ing trade  can  directly  increase  credit.  Expanding  trade 
can  increase  credit,  (a)  only  by  changing  the  habits  of  the 
people,  so  as  to  alter  the  ratio,  M  to  M'.  or  (b)  by  reducing 
the  price-level,  and  so  bringing  in  money  from  abroad, 
whence,  as  M  is  now  increased,  M'  rises  proportionately. 
"An  increase  in  the  volume  of  trade  in  any  one  country, 
say  the  United  States,  ultimately  increases  the  money  in 
circulation  (M).  In  no  other  way  could  there  be  avoided 
a  depression  in  the  price-level  in  the  United  States  as  com- 
pared with  foreign  countries.  [He  should  say,  from  the 
standpoint  of  his  theory,  thai  increasing  trade  will  cause  a 
fall  in  the  price-level,  and  so  bring  in  more  money.]  The 
increase  in  M  brings  about  a  proportionate  increase  in  M' .'- 
Besides  this  effect,  the  increase  in  trade  undoubtedly  has 
some  effect  in  modifying  the  habits  of  the  community  with 
regard  to  the  proportion  of  check  and  cash  transactions, 
and  so  tends  somewhat  to  increase  M'  relatively  to  M;  as 
a  country  grows  more  commercial  the  need  for  the  use  of 
checks  is  more  strikingly  felt."^  In  a  footnote  to  this 
paragraph,  he  defines  the  issue  still  more  sharply.  "This 
is  very  far  from  asserting  as  Laughlin  does  that  '  The  limit 

'  C/.  our  chapter,  vtU%  on  "The  Quantity  Theory  and  International 
Gold  Movements.'' 
'  Italics  mine. 
'  Loc.  cil.,  p.  165. 


282 


THE  VALUE  OF  MONEY 


to  the  increase  in  legitimate  creflit  operations  is  always 
expansible  with  the  increase  in  the  actual  movement  of 
goods';  see  Principles  of  Money ^  New  York  (Scribner), 
1903.  p.  82.  We  have  seen,  in  Chapter  IV,  that  deposit 
currency  is  proportional  to  the  amount  of  money;  a  change 
in  trade  may  indirectly,  /.  e.,  by  changing  the  habits  of  the 
community,  influence  the  proportion,  but.  except  for 
transition  periods,  it  cannot  influence  it  directly."  2 

My  own  explanation  of  the  causal  sequence  whereby  ex- 
panding trade  brings  money  into  a  country  would  be  rad- 
ically different  from  that  given  by  Fisher  in  the  first  quo- 
tation.    I  should  expect,  first,   that  rising  prices  would 
encourage  rising  trade;  I  should  then  expect  the  rising 
volume  of  trade,  with  higher  prices,  to  lead  borrowers  to 
need,  and  secure,  larger  loans  from  the  banks,  with,  as 
loans  and  deposits  rise  in  proportion  to  reserves,  some  slight 
increase  in  "money-rates,"  just  enough  to  draw  to  the 
country  the  extra  gold  which  bankers  felt  desirable  to  add 
to  their  reserves.     I  should  expect  the  causal  sequence  to 
be  the  exact  reverse  of  that  which  Fisher  indicates.    With 
falling  prices,  or  waning  volume  of  trade— which  would 
usually  come  together.''— I  should  expect  loans  to  be  re- 
duced, deposits  to  be  reduced,  money-rates  to  fall,  and 
gold  then  to  leave  the  country  again.     I  should  expect 
this  sort  of  thing  to  happen  normally,  and  not  infrequently, 
and  I  should  expect  gold  to  come  in  and  go  out  many  times 
in  the  course  of  a  business  cycle.     This  would  seem  to  be 
the  sort  of  explanation  which  our  modern  theory  of  elastic 

'  The  resemblance  of  the  view  here  maintained  to  that  of  Professor  Laugh- 
Im  IS  at  many  {joints  close.  I  am  indebted  to  his  Principles  of  Money  for 
many  suggestions.  '' 

2  Luc.  n't.,  p.  1O5,  n.    The  doctrine  is  reiterated  on  p.  i68. 

'  This  is  strikingly  true  in  the  stock  market-the  place  where  more  trade 
UikL-^  [,hue  than  ill  any  other  market.  See  the  ligures  in  the  preceding 
c. ->pter  with  reference  to  stock  transactions,  and  the  chapter  on  "  B-nk 
Aboets  and  Bank  Reserves." 


THE  VOLUME  OF  TRADE,  MONEY  AND  CREDIT   283 

bank-credit  would  give  in  connection  with  this  problem. 
I  shall  not  here  go  into  details  with  the  theory  of  elastic 
bank-credit.  The  theory  has  been  too  well  established  in  the 
debates  between  the  "Currency  School"  and  the  "Bank- 
ing School"  '  in  regard  to  bank-notes  to  need  elaboration 
and  defence  here,  and  the  essential  identity  of  deposits  and 
elastic  bank-notes  from  this  angle  is  one  of  the  common- 
places of  the  literature  of  banking.  What  I  am  here  con- 
cerned with  is  the  highly  significant  fact  that  Fisher's 
"normal"  theory  finds  no  place  for  this  highly  important 
phenomenon.  The  quantity  theory  has  no  explanation 
of  el.  sticity  to  give.  On  the  basis  of  the  quantity  theory, 
and  for  all  that  the  quantity  theory  can  say,  the  Currency 
School  was  right!  Fisher  offers  us,  virtually,  a  "currency 
theory"  of  deposits.  "Suppose,  as  has  actually  been  the 
case  in  recent  years,  that  the  ratio  of  M'  to  M  increases  in 
the  United  States.  If  the  magnitudes  in  the  equations  of 
exchange  in  other  countries  with  which  the  United  States  is 
connected  by  trade  are  constant,  the  ultimate  effect  on  M 
is  to  make  it  less  than  what  it  would  otherwise  have  been, 
by  increasing  the  exports  of  gold  from  the  United  States  or 
reducing  the  imports.  In  no  other  way  can  the  price-level 
of  the  United  States  be  prevented  from  rising  above  that 
of  other  nations  in  which  we  have  assumed  this  level  and 
the  other  magnitudes  in  the  equation  of  exchange  to  be 
quiescent."  (P.  162.)  If  "bank-notes"  be  substituted  for 
"M'",  in  this  quotation,  we  have  here  a  perfect  statement 
of  the  position  of  the  "Currency  School"  in  that  great  de- 
bate. Must  this  old  issue  be  fought  all  over  again?  And 
yet,  I  defy  any  consistent  quantity  theorist  to  find  any  flaw 
in  Fisher's  argument  on  this  point.    The-e  is  no  place  for  a 

'  For  a  hiitory  of  this  debate,  with  bibliography,  see  Laughlin's  Principles 
of  Money,  ch.  7,  on  the  "History  a.id  Literature  of  the  Quantity  Theory," 
esp.  pp.  260  and  263-264.  Laughlin  shows  the  roni.,'ction  of  the  currency 
principle  and  the  quantity  theory. 


284 


nil;    VALUE   OK   MONKY 


,:f 


theory  of  elastic  bank-credit  within  the  confines  of  the 
quantity  theory.  Fisher's  recognition  of  this  seems  full 
and  complete.  He  relegates  all  mention  of  elastic  bank- 
credit  to  "transitions."  The  footnote  quoted  above,  in 
which  Laughlin's  fsomewhat  extreme)  doctrine  based  on 
the  theory  of  elasticity  is  stated,  denies  categorically  that 
there  is  any  validity  in  it,  except  for  transition  periods 
There  is  nowhere  in  the  book  any  explanation  of  the  theory 
of  elastiqty."     The  references  to  it  are  few  and  grudging, 

tlnr^^'P^Vl  ^^""^  '"  ""■  ''"'■^  d\^»^hn  of  flastic  bank-notes  on  p.  ,7, 
IrL  '  r!-"'  T'"'  '"  *^"'"  ''"  explanation  of  the  theory  of  elasticity 
from  a  c,uant.ty  theory  stand,H,int.  The  statement  there  is  that  money 
no  only  tends  to  flou  away  from  places  where  prices  are  hi«h,  but  also  from 
//«/.v  when  money  .s  h.^h.  "'If  the  price-level  is  hi«h  in  January  as  com 
pare<i  w.th  the  rc-st  of  the  year,  bank-notes  will  not  tend  to  be  istued  Tn 

^  'TwT  '^"'-  ?  '^'  '■""^^'''^■'  '  ''^^'  «■'»  '^^^  to  -"i'l  PayinK 
money  at  h.Rh  prices  and  wait  till  prices  are  lower.    When  that  time  com« 

m.;.  "IZ  '"""'  *i""'"7'.  '^'^"•'-""^'-^  and  deposits  may  then  expand  to 

meet  he  excessive  demand  tor  loans  which  mav  ensue.  Thus  currency 
ex,,ands  when  prices  are  low  and  contacts  when  prices  are  hish.  and  such 
e.xi.ansions  and  contractions  ten.l  to  lower  the  hi«h  prices  and  to  raise  the 
low  prices,  thus  working  toward  mutual  equality." 

If  this  be  the  quantity  theory  account  of  elasticity-and  it  would  seem 
to  be  about  the  cnly  thing  the  quantity  theory  could  say-it  is  XuTTs 
far  from  K.ying  an  account  of  the  real  facts  as  any  theorv  could  be!  Some- 
thing of  this  sort  IS  suggeslc<l,  ,M.-rhaps,  by  the  behavior  of  Canadian  bank- 

contract  in  January,  when  wheat  prices  are  higher.    This  grows,  how'ever. 
out  of  the  peculiarities  of  an  agricultural  country,  and  does  not  at  all  illus- 
ratc  the  general  doctrine  maintained.     First,  wheat  prices  in  the  fall  are 
ow  because  wheat  is  most  abundant  then.    Wheat  prices  in  January,  under 
the  influence  of  speculation,  commonly  dilTer  from  wheat  prices  in  the  fall 
by  an  amount  about  e<)ual  to  the  elevator  charges,  rattage,  insurance,  inter- 
est, and  other  carrying  .barges  insched.     Second,  wheat  ,,rices  are  onlv 
one  element  m  the  general  price-level.    Low  wheat  does  not  prove  that  the 
level  ,s  necessarily  low.    A  good  wheat  crop  may  mean  increasc-s  in  general 
prices,  and  often  docs.    Third,  an.l  more  .m,H.rtant.  the  real  reason  for  an 
.^M-ansion  in  (  ant.lian  notes  a.  such  a  tii.ie  is  that  the  wheat  Us  to  be  moval 
he  farmers  do  not  want  to  carr>-  it;  the  speculators  are  ready  to  carry  it;' 
and  It  must  be  sold     Kxpan.ling  trade,  at  the  season,  is  the  cause  of  expami 
mg  bank-notes.    The  influence  of  the  price  of  wheat  is  exaCiv  the  reverb  of 
that  whuh  Iisher  as.s.gns     It  the  price  of  wheat  is  low  in  the  crop-moving 
season,  less  notes  will  be  issued  than  if  the  price  is  high.    In  other  worcls 
the  great.  .■  the  increase  in  PT,  not  1'  or  T  alone,  the  greater  will  be  the 


THE  VOLUME  OF  TRADE,  MONEY  AND  CREDIT    2S5 

and  always  in  connection  with  the  n<jtion  of  transitions. 
The  most  important  statement  regarding  elasticity  (less 
than  a  page  long)  is  on  page  i6i,  where  again  transitional 
influences  are  under  discussion.  What  is  a  theory  of  money 
worth  which  can  offer  no  explanation  of  so  fundamental, 
important,  and  notorious  a  feature  of  modern  money  and 
banking? 

There  is  a  further,  related,  feature  of  banking  for  which 
the  quantity  theory  can  find  no  explanation.  Among  the 
items  in  a  bank's  balance  sheet,  the  quantity  theorist 
seizes  upon  reserves  on  the  assets  side,  and  deposits  on  the 
liability  side,  and  builds  his  theory  on  the  supposed  close 
relation  between  them.  We  have  seen  that  this  close  rela- 
tion does  not,  in  fact,  exist.     The  range  of  variation  is 

expansion  of  bank-notes.  Decrease  either  P  or  T,  and  less  notes  will  he 
issued. 

In  general,  the  phenomenon  of  elastic  bank-credit  is  the  phenomenon 
of  an  expanding  bank-note  or  dcfwsit  issue  accompanied  by  rising  prices 
and  volume  of  trade,  and  a  decrease  when  trade  and  prices  decrease.  This 
is  all  commonplace,  but  I  feel  it  best  to  refer  to  familiar  sources  to  show  how 
old  and  well  recognized  my  statement  of  the  case  is.  The  following  is  from 
Mill's  Principles  of  Economics,  Bk.  Ill,  ch.  24,  par.  i:  "\ot  only  has  this 
fixed  idea  of  the  currency  as  the  prime  agent  in  the  fluctuations  of  price 
made  them  shut  their  eyes  to  the  multitude  of  circumstances  which,  by 
influencing  the  ex|x;ctations  of  supply,  arc  the  true  causes  of  almost  all 
s|)eculations  ;ind  of  almost  all  fluctuations  of  price;  but  in  order  to  bring 
about  the  chronological  agreement  nxjuired  by  their  theory,  between  the 
variations  of  bank  issues  and  those  of  prices,  they  have  played  such  fan- 
tastic tricks  with  facts  and  dates  as  would  ue  thought  incredible,  if  an  emi- 
nent practical  authority  had  not  taken  the  trouble  of  meeting  them,  on  the 
ground  of  mere  history,  with  an  elaborate  exposure.  I  refer,  as  all  con- 
versant with  the  subject  must  be  aware,  to  Mr.  Tooke's  History  of  Prices. 
The  result  of  Mr.  Tooke's  investigations  was  thus  stated  by  himself,  in  his 
examination  before  the  Commons  Committee  on  the  Bank  Charter  question 
in  18,52;  and  the  evidences  of  it  stand  recorded  in  his  Ixwk:  '  In  [Mnnt  of  fact, 
and  historically,  as  far  as  my  researches  have  gone,  in  e\er\-  signal  instance 
of  a  rise  or  fall  of  prices,  the  rise  or  fall  has  preceded,  and  therefore  could 
not  Ihj  the  effect  of,  an  enlargement  or  contraction  of  the  bank  circula- 
tion.' " 

I  see  nothing  in  Fisher's  discussion  of  credit  to  differentiate  it  from  thi; 
position  of  the  old  Currency  School.  .And  the  reason  is  a  very  simple  one: 
Fisher  has  followed  the  quantity  theory  to  its  logical  conclusions! 


386 


THi;  VALUE  OF  MONF.Y 


Bl  !■■ 


Jii, 


enormous.'  But  there  is  one  close  relation  in  the  balance 
sheet  of  the  bank  concerning  which  the  quantity  theory  is 
silent,  and  that  is  the  relation  between  deposits  and  loans. 
For  individual  banks  and  for  banks  in  the  aggregate,  for 
long  run  periods  and  for  short  run  periods,  for  reasons  that 
are  clear  and  inevitable,  these  two  magnitudes  (or  for 
banks  of  issue  on  the  Continent  of  Kurope,  nolcs  and  loans), 
vary  closely  together.  The  relationship  between  them  is 
the  only  relationship  which  does  stand  out  as  clearly  beyond 
dispute,  among  all  the  items  in  the  banking  balance  sheet. 
No  assumptions  of  a  "static  state"  are  needed  for  its 
demonstration!  The  relation  varies,  of  course.  As  banks 
increase  or  reduce  their  capital,  as  their  reserve-percentages 
rise  or  fall,  as  they  increase  or  decrease  their  holdings  of 
bonds,  we  fmd  reasons  which  alter  the  proportion  between 
deposits  and  loans.  But,  despite  this,  the  variation,  as 
shown  by  figures  for  the  United  States,  is  slight.  Assume, 
for  example,  a  statement  showing  "loans  and  discounts" 
of  $i,cxx3,ooo,  deposits,  $i,ooo,cxx),  cash  reserve,  $200,000. 
Reserves  are  then  20*^^  of  deposits,  and  loans  are  100%  of 
deposits.  If  reserves  be  increased  by  $100,000  and  loans 
and  discounts  reduced,  to  compensate,  by  $100,000,  we 
have  a  50%  variation  in  the  ratio  of  reserves  to  deposits, 
with  only  a  10%  variation  in  the  ratio  of  loans  and  dis- 
counts to  deposits.  Since  cash  reserve  is  much  the  smaller 
item,  almost  always,  the  same  absolute  variation  in  it 
will  afTect  it,  in  percentage,  vastly  more  than  it  will  affect 
loans  and  discounts.  It  is  strange  that  a  theory  should 
seize  on  this  highly  variable  ratio  of  reserves  to  deposits, 
and  ignore  the  much  more  constant  ratio  -  of  loans  and 
discounts  to  deposits. 

'  See  our  chapter  on  the  "Volume  of  Afoney  and  the  Volume  of  Credit." 
^  How  close  the  relation  between  loans  and  dejjosits  is  may  be  seen  from 
Professor  Mitchell's  chart.  Business  Cycles,  p.  344.     The  same  chart  ex- 
hibits the  variations  in  the  reserve  i)ercentage,  which  is  very  much  greater. 


THE   VOLUME  OF  TRADE,  MONEY  AND  CREDIT        287 

That  this  close  relation  between  deposits  and  loans  should 
obtain  follows  naturally  from  the  theory  of  elastic  bank- 
credit.     The  two  are  built  up  together.     When  there  are 
e.\i)anding  business  and  rising  prices,  men  borrow  more 
from   the  banks;  as   they  borrow,   they  receive  deposit 
credits;  the  indi\idual  who  receives  the  dejwjsit  credit  may 
check  against  it,  but  it  is  redeposited  by  another  man,  and 
so.  while  the  deposits  of  one  bank  need  not  grow  out  of  its 
loans,  still,  for  banks  in  general,  deposits  are  large  because 
loans  are  large.    For  a  given  bank,   the  relation  holds 
closely,  because  the  bank  lends,  in  general,  to  active  busi- 
ness men,  who  will  have  income  as  well  as  outgo,  and  whose 
income  will,  on  the  average,  at  least  balance  their  outgo. 
Thus,  through  loans,  deposits  are  linked  with  volume  of 
trade  and  prices.    Trade  and  deposits  wa.x  and  wane  to- 
gether.'   On  the  other  hand,  in  the  absence  of  rising  prices 
and  increasing  trade,  reserves  may  increase  greatly  without 
forcing  an  increase  in  deposits.    Loans  cannot  increase 
without  an  increase  in  deposits.    The  linkage  between 
deposits  and  trade  is  definite,  causal,  positive,  statistically 
demonstrable.     The  linkage  between  reserves  and  deposits 
is,  at  most,  negative— if  reserves  get  too  low,  deposits  and 
loans  may  be  checked  in  their  expansion.    But   this— to 

The  .\ew  York  Clearing  House  banks,  which  wc  have  seen  {supra,  -Volume 
of  Money  and  Volume  of  Credit")  have  a  spread  of  from  24.89%  to 
3759%  in  the  yearly  average  of  percentage  of  reserves  to  deposits— 
a  spread  of  over  50%— show  a  variation  in  yearly  average  for  the  per- 
cent^age  of  loans  to  dejwsits  of  only  24.3%— the  range  being  from  83%  to 
104%.  Ibid.,  pp.  325  and  331.  For  a  paUially  different  series  of  years, 
see  the  chart  of  J.  P.  Norton,  Statistical  Studies  in  tlie  Nrw  York  Money 
Mi'rktt,  facing  p.  104. 

'  Neither  deposits  nor  loans  vary  proportionately  with  trade.  Very  active 
trade  may  merely  increase  the  activity  of  loans  and  deposits,  causing  both 
to  be  shifted  more  rapidly— larger  outgo,  larger  income,  loans  more  fre- 
cjuently  contracted  anH  n.ud  off.  lareer  amnsmts  "deposited"  on  a  given 
day,  but  balances,  bott.  of  loans  and  deposits,  at  the  end  of  the  day  not 
increased  profwrtionately  with  the  activity.  This  is  strikingly  illustrated 
in  the  business  of  the  stockbroker. 


; !  fl: 


?ss 


TITK   VAirr   OF   MONKY 


the  extent  that  it  is  true,  which  we  lerve.  for  detailed  anal- 
ysis, for  Part  III  gives  a  very  much  looser  relation  indeed 
than  the  direit  relation  Intween  loans  and  dei)osits. 

The  (juantity  thntry  has  olTered  no  explanation  of  this 
relation  between  loans  and  deposits.  What  explanation 
could  a  theory  olTer.  which  rests  in  the  notion  that  volume 
of  trade  on  the  one  hand,  and  volume  of  money  and  bank- 
( redit  on  the  other  hand,  are  independent  magnitudes?'  I 
do  not  mean  that  quantity  theorists  are  silent  regarding  the 
relation  of  loans  and  deiiosits.  I  mean  that  they  do  not 
"attempt,  in  any  discussion  I  have  found,  to  apply  the  quan- 
tity theory  to  the  explanation  of  that  relation.  What  shall 
we  say  of  a  theor)  which,  ignoring  these  easily  proved, 
easily  explained,  and  \ital  facts  regartling  bank-credit, 
offers  as  its  sole  exi)lanation  of  volume  of  bank-credit  a 
theory  so  untenable  as  that  of  a  fixed  ratio  between  volume 
of  bank-credit  and  volume  of  money  in  circulation,  with 
causation  running  from  money  to  deposits? 

Professor  Fisher  sa\s  little  about  bills  of  exchange.  Here, 
surely,  we  have  a  credit  instrument  which  grows  directly 
out  c^  ti  ."c  in  gviiiral,  and  whose  volume  expands  and 
(ontracts  with  trade.  When  banks  discount  bills  of  ex- 
( hange.  and  issue  notes,  or  grant  dejHisit  credits,  against 
such  discounted  bills,  the  connection  of  bank-credit  and 
volume  of  trade  is  obvious.  The  same  thing  holds  largely, 
however,  when  promissory  notes  arc  discounted.  Such 
notes  are  usually  gi\  en  by  those  w^ho  plan  to  use  the  credits 
granted  in  commercial  or  .speculative  transactions.  The 
bill  of  exchange  (Offers  from  the  promissory  note  in  prac- 
tice, however,  in  that  it  itself  is  often  a  medium  of  ex- 
change, without  going  into  the  bank's  portfolio.  "The 
bill  of  exchange,  therefore,  before  it  gets  to  the  bank  usually- 
l)erlorms  a  series  of  monetary  transfers,  for  the  small 

'Supra,  p.  47.  Mtalics  mine. 


TlIK   VOLUME   OF  TRADE,   MONEY  AMJ  CKEUIT        .\S(> 

dealer  naturally  prefers  to  pass  on  the  bill,  if  {M)ssil>!f.  in 
making  a  pa>'nient.  instead  of  handing  it  ovir  to  hi>  bank, 
which  would  either  deduct  a  certain  pcrcentagi-  in  the  w.iy 
of  discount,  or  else  accept  the  bill  at  its  face  value,  crediting 
the  customer  with  the  amount  on  the  date  of  maturity, 
while  business  men  (other  than  bankers)  arc  in  the  habit  of 
taking  bills  of  exchange  as  they  would  cash."  '    'J'his  qm- 
tation  describes  conditions  in  Germany.     Tl:.-  same  au- 
thorities (p.  176)  give  figures  showing  a  rapid  development 
in  the  volume  of  bills  of  exchange,  rising  from  about  i,^ 
billions  of  marks  in  1872  to  about  3 1  billions  in  igo?.    These 
ligures  show  that  bills  of  exchange  are  a  big  factor  in  German 
business  life,— a  conclusion  that  is  strengthened  when  they 
are  compared  with  the  figures  for  giro-transfers  on  pp   188 
189  of  the  same  article,  or  with  the  figures  for  note  issue 
on  p.  209.-    In  the  United  States,  of  course,  the  use  of  bills 
of  exchange  has  become  comparatively  unimportant  in 
domestic  commerce,''  though  there  is  a  movement  to  revive 
them,  since  the  new  Federal  Reserve  system  has  come  in. 
Their  chief  importance  is  in  connection  with  foreign  trade. 
Is  it  possible  that  Professor  Fisher's  reason  for  wishing  to 
minimize  foreign  trade  *  is  the  unconscious  desire  to  get 

'  Miacllaneous  Articles  on  (krmun  Biinkinjr,"  in  Keporl  0/  Xat.  Mon 
Commissitm,  p.  175.    Art.  by  Max  VVittner  :in<i  Siegfried  WollT. 

2  The  tiKures  arc  not  easily  compared,  as  the  lifcures  k>t  v,\tn-transj,rs  do 
not  indicate  the  volume  of  Kiro-.;,<(»«(;/v.  wliich  is  <ioubtlcss  miu  h  smaller, 
r  know  no  estimates  for  the  turnover  either  of  notes  or  of  bills  of  exthanse. 
To  determine  what  proporlimi  of  business  is  done  bv  each  would,  thus,  not'i)e 
easy.  The  volume  of  bills  of  exchange  for  the  \eur  is  three  times  a.l  Rreat, 
for  igo7.  as  the  tiKures  for  note  i.ssue.  The  Kiro-svstcm.  as  is  well  known! 
IS  relatively  unimixirtant  as  compared  with  notes.  But  I  do  not  undertake 
to  assign  figures  showing  proportions  of  l,usim.»  done. 

Unland  bills  of  exchanges  in  (onnertion  with  the  grain  trade  are  still 
very  imiwirtant,  e.spc.ially  at  Chicago  and  .Minnea(M)lis.  'I'he  writer  has 
met  frequent  reference  to  cotton  bills  at  St  l.oiiis.  \\(H)1  bills  are  freriuent 
in  HoKton. 

*  Vidr  my  criticism  o'  his  statistical  fallacv  in  this  connection,  in  the 
Anvalist  of  Feb.  7.  rqr  'le  rules  out  foreign  trade  from  his  "equation  of 
exchange"  by  the  dcvitv  of  assuming  that  imports  and  exjwrts  cancel  one 


i 


I 

» 

i 

i. 


290 


THE    VALUE   OF   MONEY 


■<  -I 


M 


I! 


rid  of  the  annoying  bills  of  exchange,  which  so  obviously 
tend  to  make  bank-credit  and  volume  of  trade  interde- 
pendent, and  which  further  spoil  the  quantity  theory  by 
serving  as  a  flexible  substitute  for  both  monej'  and  de- 
posits? 

I  regret  the  necessity  for  this  elementary  expositic  u  of 
familiar  things.  But  Fisher's  theory  has  no  place  for  t;  cse 
familiar  things— and  Fisher  has  merely  made  very  exphcit 
the  logic  of  the  quantity  theory! 

As  applied  to  modern  conditions,  the  quantity  theory 
is  obliged  to  assert— and  Fisher  does  assert: 

(a)  that  there  is  a  causal  dependence  of  bank-credit  on 
money,  and  "normally"  a  fixed  ratio  between  them; 

(b)  that  velocity  of  circulation  of  money  and  credit  in- 
struments are  independent  of  quantity  of  money  and 
credit  instruments; 

(c)  that,  in  general,  money  and  volume  of  credit  (taken 
together),  velocities,  and  trade,  are  independent  mag- 
nitudes, each  governed  by  separate  laws,  though  Fisher 
concedes  some  reaction  of  trade  on  velocities; 

(d)  in  particular,  that  volume  of  money  and  credit  has 
no  influence  on  trade,  and  that  trade  has  no  direct  in- 
fluence on  volume  of  credit. 

All  these  doctrines  are  necessary  if  the  contention  that 
an  increase  of  money  will  proportionately  raise  prices  is  to 
be  maintained,  or  if  it  is  to  be  maintained  that  a  decrease 
in  trade  will  proportionately  raise  prices.  I  have  analyzed 
each  of  these  contentions,  and  I  fmd  justification  for  none 

of  them. 

Not  yet,  however,  have  we  reached  the  least  tenable 

.'mother.  This.  ho\ve\  cr,  to  th"  "\tcnt  that  it  is  true,  ni.ikes  the  bill  of  ex- 
change  n.'^re,  rather  than  less,  important  as  a  substitute  for  money  and 
dcpos'  sher,  !oc.  <//..  |)p.  306,  and  374-375-     See  appendix  to  chap- 

ter X    ,       ihe  present  book. 


THE   VOLtME   OF   TRADE,   MONEY  AND  CREDIT         29I 

aspect  of  the  quantity  theory.  There  remains  the  conten- 
tion that  prices  arc  passive,  that  a  change,  originating  in 
prices,  and  involving  a  change  in  the  average  price,  or  the 
general  price-level,  cannot  maintain  itself— that  P  is  a  pas- 
sive function  of  the  other  five  magnitudes  of  the  equation 
of  exchange.  To  this  central  fortress  of  the  quantity  theory 
we  shall  devote  the  next  chapter. 


f 


?  ! 

11 


'»im 


;  I 


t| 


n?l 


:M 


CHAPTKR  XV 

THE  QUANTITY  THEORY:  THE  "  PASSIVENESS  OF 

PRICES  " 

Is  the  price-level  passive?  Is  it  true  that  while  changes 
may  occur  from  causes  outside  the  eciuation  of  exchange  in 
volume  of  money,  volume  of  trade,  and  velocities  of  circula- 
tion, a  change  in  the  price-level  from  causes  outside  the 
eciuation  is  impossible?  ]Must  the  average  of  prices  be  a 
passive  function  of  M,  the  V's,  M'  and  T?  Such  is  the 
general  contention  of  the  quantity  theory,  and  such,  very 
explicitly,  is  Fisher's  contention.  The  price-level  is  always 
effect,  and  never  cause  (with  slight  modifications  of  the 
doctrine  for  transition  periods)  in  its  relations  to  the  other 
magnitudes  in  the  equation  of  exchange. 

Now  in  one  sense,  it  is  my  own  contention  that  the  price- 
Icvcl  ct.n  never  be  a  cause  of  anything.  The  price-level  is 
an  average.  Averages  may  be  indicia  of  causation,  but 
they  are  not  themselves  causes.  They  are  not.  in  reality, 
anything  at  all.  C  ausation  is  a  matter  which  pertains  to 
the  particulars  of  which  the  average  is  made.  But  this  is 
not  the  doctrine  of  the  quantity  theory.  The  quantity 
theory  does,  in  certain  connections,  assign  causal  influence 
to  the  level  of  prices,  particularly  in  the  theory  of  foreign 
exchange,  where  the  explanation  of  international  gold 
movements  rests  on  the  doctrine  that  a  price-level  in  one 
country,  higher  than  the  price-level  of  another  country, 
drives  money  away.'  It  will  be  seen,  in  a  moment,  that 
iM'sher  relies  on  this  principle  to  prove  that  the  price-level 

'  I ■/(/(•  til.  1 6  for  a.  more  precise  statcnu-nt  of  this  purt  of  quantity  theory 
doLtriiif. 

392 


!  ' 


THE       PASSIVENESS   OF   PRICES 


293 


of  a  country  cannot  rise  without  an  increase  of  money — if  it 
(lid  so  rise,  it  would  firive  out  the  money,  and  so  be  forced 
down  af,'ain.  The  point  at  issue  may  be  stated  in  terms  of 
particular  prices.  The  quantity  theory  is  that,  while  par- 
ticular prices  may  rise  from  causes  affecting  them,  as  com- 
pared with  other  prices,  without  a  change  in  money,  veloc- 
ities, etc..  still  there  cannot  be  a  rise  in  the  general  average, 
because  other  prices  will  be  obliged  to  go  down  to  com- 
pensate. The  issue  is  as  to  the  possibility  of  a  rise  in  par- 
ticular prices,  uncompensated  by  a  corresponding  fall  in 
other  Particular  prices,  without  a  prior  increase  in  money, 
or  velocities,  or  decrease  in  trade.  I  take  up  the  issue  in 
this  form.  I  shall  maintain  that  particular  prices  can.  and 
do,  rise,  without  a  prior  increase  in  money  or  bank-deposits, 
or  change  in  the  volume  of  trade,  or  in  velocity  of  money 
or  deposits  and  also  without  compensating  fall  in  other 
particular  prices.  Putting  it  in  terms  of  Fisher's  equation, 
I  shall  maintain,  as  against  Fisher,  that  P  can  rise  through 
the  direct  action  of  f-^ctors  outside  the  equation  of  exchange, 
that  as  a  consequetict.  of  such  rise  the  other  factors  readjust 
themselves,  and  that  a  new  equilibrium  i.>;  reached  which, 
in  the  absence  of  new  disturbances  from  causes  outside  the 
equation,  tends  to  be  as  permanent  and  stable  as  the  old 
equilibrium  was. 

In  the  argument  which  follows,  I  shall  respect  thoroughly 
the  distinction  between  "normal"  and  "transitional" 
effects.  I  do  not  think  that  this  distinction  is  properly 
drawn  by  Fisher.  In  my  discussion  of  the  relation  be- 
tween the  volume  of  bank-credit  and  the  volume  of  trade, 
and  in  other  connections,  I  have  shown  that  Fisher  leaves 
out  of  his  normal  theory  most  of  the  concrete  factors  which 
do  affect  both  the  concrete  magnitudes,  and  the  long  run 
averages,  of  the  factors  in  his  own  equation.  But  for  the 
present,  I  shall  meet  him  on  his  own  ground,  give  his  dis- 


i 


,' 


i 


[■  f 


1 1 


2Q4 


THF.   VALUE   OF  MONEY 


Unctions  th< '-  fullest  weight,  and  carry  my  argument 
through  tht  transition "  to  a  point  where  no  further 
change  among  thf  factors  in  the  equation  can  be  expected 
as  ;;  consec[uen(  c  of  the  initial  change  assumed. 

i'isher's  argument  to  show  the  passiveness  of  prices  takes 
the  form  of  a  rcduclio  ad  absurdiim.  "To  show  the  un- 
tcnability  of  such  an  idea  let  us  grant  for  the  sake  of  argu- 
ment that — in  some  other  way  than  as  efTect  of  changes  in 
M,  M',  V,  V,  and  the  Q's — the  prices  in  (say)  the  United 
States  are  changed  to  (say)  double  the  original  level,  and 
let  us  see  what  effect  this  will  produce  on  the  other  magni- 
tudes in  the  equation."  '  Then,  if  the  equation  of  exchange 
is  to  be  maintained,  either  M  or  M'  or  their  velocities  must 
be  increased,  or  trade  must  be  reduced.  But  he  holds  that 
none  of  these  is  possible,  (i)  Money  will  be  reduced.  High 
prices  drive  money  away  to  other  countries.  Nor  can 
gold  come  in  via  the  mints.  "No  one  will  take  bul- 
lion to  the  mints  when  he  thereby  loses  half  its  value."  ^ 
On  the  contrary,  men  will  melt  down  coin.  Nor  will  high 
prices  stimulate  mining.  Rather,  by  raising  the  expenses 
of  mining,  they  will  discourage  mining.  (2)  Bank-deposits 
cannot  increase.  Bank-deposits  depend  on  the  amount 
of  money,  and  as  that  is  reduced,  they  must  be  reduced,  to 
keep  their  normal  ratio  to  the  volume  of  money.  (3)  The 
appeal  to  velocities  is  no  more  satisfactory.  These  have 
been  already  adjusted  to  individual  convenience.^  (4)  Nor 
can  trade  be  decreased.  Since  the  average  person  will  not 
only  pay,  but  also  receive,  high  prices,  there  is  no  reason 
why  he  should  reduce  his  purchases.  ^^The  price-level  is 
normally  the  one  absolutely  passive  element  in  the  equation  oj 
exchange.''''  * 

"But  though  it  is  a  fallacy  to  think  that  the  price-level 


•  Purchasing  Power  of  Money,  pp.  169-170. 

*  Ibid.,  p.  I/O. 


'  Ibid.,  p.  171. 
*  Ibid.,  p.  172. 


THE       PASSIVEXESS  OF   PRICES 


295 


in  one  community  can,  in  the  long  run.  affect  the  money  in 
that  community,  it  is  true  that  the  price-level  in  one  com- 
munity may  affect  the  money  in  another  community.  This 
proposition  has  been  repeatedly  made  use  of  in  our  dis- 
cussion, and  should  be  clearly  distinguished  from  the  fal- 
lacy above  mentioned.  The  price-level  in  an  outside  com- 
mu  'ty  is  an  influence  outside  the  equation  of  exchange  of 
that  community,  and  operates  by  affecting  its  money  in 
circulation  and  not  by  directly  affecting  its  price-level. 
The  price-level  outside  New  York  City,  for  instance,  ajfccls 
the  price-level  in  New  York  City  only  via  changes  in  t/ie  money 
in  New  York  City."  '  .  .  . 

"Were  it  not  for  the  fanatical  refusal  of  some  economists 
to  admit  that  the  price-level  is  in  ultimate  analysis  effect 
and  not  cause,  we  should  not  be  at  so  great  pains  to  prove 
it  beyond  cavil."  To  explain  this  "fanatical  refusal," 
Fisher  alludes  to  the  "fallacious  idea"  that  the  equation 
of  exchange  cannot  determine  the  price-level,  because  the 
price-level  has  already  been  detennined  by  other  causes, 
usually  alluded  to  as  "supply  and  demand."  He  urges, 
however,  that  supply  and  demand,  cost  of  production,  etc., 
relate,  not  to  the  price-level,  but  only  to  particular  prices: 
that  the  price-level  is  a  factor  prior  to,  and  independent  of, 
the  particular  prices,  and  is  presupposed  by  theories  like 
supply  and  demand,  cost  of  production,  etc- 

The  rednctio  ad  absurdum,  at  first  blush,  looks  impressive. 
One  obvious  criticism  suggests  itself,  however,  and  i'  will 
be  found  to  give  a  clue  to  a  much  more  fundamental  criti- 
cism: is  it  reasonable  to  assume  a  doubling  of  all  prices? 
Above  all,  must  the  assumption  involve  the  doubling  of  the 
price  of  gold  bullion?  Part  of  the  argument  to  show  that 
gold  bullion  would  not  be  minted  rosts  on  that  assumption. 
But,  more  fundamental,  for  such  an  all  round  doubling  of 

'/fc/'d.,  p.  172.    Italics  mine.  '/6/rf.,  pp.  174-181. 


'! 


Pi  1 

HM 

In 

-^  ^IN  j.  ^ 

:    ':!        ' 

[m    h 

Kl 

396 


THE   VALUE   OF   MONEY 


prices,  no  cause  could  be  assigned.  Of  course  the  hypoth- 
esis of  an  increase  in  prices  without  any  cause  is  absurd, 
and  Fisher  easily  disposes  of  it.  But  suppose  we  assign 
some  concrete  causes,  outside  the  equation  of  exchange, 
which  might  affect  prices,  and  see  how  the  thing  works 
then! 

Fisher  states  on  p.  95  that  "other  elements  in  the  equa- 
tion nf  exchange  than  money  and  commodities  '  cannot  be 
transported  from  one  place  to  another."  And  in  the  pas- 
sage quoted  above  he  maintains  that  price-levels  in  one 
country  can  influence  price-levels  in  another  country,  or 
even  price-levels  in  one  city  can  influence  price-levels  in 
another  city,  only  via  changes  in  money,  in  the  second 
country  or  city.  But  other  elements  in  the  equation  are 
directly  transferable,  in  fact.  Deposits,  c.  g.,  in  London, 
to  the  credit  of  New  York  bankers,  may  be  transferred  to 
Paris,  directly,  by  cable  or  by  letter,  and  prices  are  con- 
stantly being  directly  passed  from  one  country  or  market 
to  another  by  the  same  media.  Let  us  suppose  a  strong 
case,  to  put  our  principle  in  relief.  Assume  an  island,  which 
produces  a  staple  widely  used,  whose  chief  centre  of  pro- 
duction is  outside  the  island.  Assume  that  this  staple,  an 
agricultural  product,  rises  greatly  in  price,  owing  to  a 
blight,  which  promises  to  be  permanent,  in  the  main  pro- 
ducing region.  The  blight  does  not  affect  the  island,  how- 
ever. Let  this  product  be  the  main  product  of  our  island, 
which  we  shall  assume  to  be  small.  Let  the  island  have 
communication  with  the  outside  world  by  boat  only  once 
in  three  months.  Let  it  be,  however,  in  constant  com- 
munication by  cable.  Wort!  comes  by  cable  of  the  rise  in 
the  price  in  the  staple.     The  staple  at  once  rises  in  the 

'  I  call  altention,  in  pussiiiK,  to  Fisher's  confusion,  in  this  sentence,  of 
■'commodities"  with  "trade."     This  occurs  frequently  in  his  argument. 

Cf.  pp.  225-JJ6,  supra. 


THE       PASSIVENESS   OF   PRICES 


■^07 


island.  No  new  money  has  come  in  to  cause  it.  Will 
this  l)e  a  rise  in  the  price-level?  Will  there  be  compensat- 
ing reductions  in  the  prices  of  other  things  to  leave  the 
price-level  unchanged?  What  prices  can  fall?  Not  the 
I)rices  of  goods  that  have  been  imported  to  the  island, 
surely.  They  will  rather  tend  to  rise,  because  everybody 
on  the  island  will  feel  richer  than  before,  and  will  be  dis- 
posed to  buy  more  freely.  Meanwhile,  merchants  and 
bankers  on  the  island  will  be  more  ready  to  extend  credit 
than  before,  so  that  they  will  be  able  to  buy  more  freely. 
What  else  can  fall?  Not  the  prices  of  the  land!  Rather, 
the  land  will  rise  in  price  greatly,  because  the  increased 
price  of  the  staple,  expected  to  be  permanent,  will  promise 
bigger  rents,  and  the  price  of  the  land,  being  a  capitaliza- 
tion of  the  annual  rental,  will  rise  very  much  more  than 
anything  else — it  will  rise  to  the  extent  of  the  capitalized 
price  of  the  increase  in  the  rents.  Wages,  likewise,  will 
rise,  since  the  price  of  the  product  of  labor  has  risen.  And 
the  capital  instruments  in  use  in  producing  the  staple  will 
also  rise,  though  not  so  much  as  land  and  wages,  inasmuch 
as  they  can  be  brought  in  from  outside  at  the  end  of  three 
months.  What  is  there  that  can  fall — except,  perhaps, 
such  goods  as  are  exclusively  designed  for  the  construction 
of  poorhouses!  A  significant  particular  price  rises — that 
i.",  the  first  step;  then,  from  causes  familiar  to  all  students 
of  economics,  other  related  prices  rise;  there  is  a  general 
sympathetic  rise  in  prices,  the  price-level  has  risen  independ- 
ently, from  causes  outside  tlie  equation  of  exchange.  But 
now,  can  this  rise  sustain  itself?  Well,  what  can  bring  it 
down?  When  the  ship  comes,  at  the  end  of  three  months, 
it  will  bring  in  additional  supplies  of  the  articles  of  import, 
and  they  will  go  down  to  their  old  level.  Will  they  go  any 
lower  than  the  old  level?  What  is  there  to  cause  them 
to  do  so?    The  outside  price-level  should  be  higher  now, 


298 


THK    VALUE    OF   MONEY 


rather  than  lower,  since  the  stock  of  the  staple  in  question 
is  reduced,  and  nothing  else  increased  to  compensate.  Xor 
can  ail}-  reason  be  assigned  why  other  prices  on  the  island: 
the  staple  in  question,  land: ,  wages,  etc.,  should  fall  at  all 
from  the  level  they  reached  when  the  news  first  came. 

Incidentally,  our  ship  may  also  bring  in  more  gold.  The 
bankers,  fmding  their  deposits  expanding,  may  feel  it  well 
to  cable  orders  for  more  gold  to  increase  their  reserves, 
especially  as  they  have  been  subject  to  somewhat  unusual 
calls  for  cash  for  hand  to  hand  circulation — though  this 
last  need  they  might  well  have  been  meeting  by  expanding 
their  note  issue. 

Is  there  anything  else  to  be  said?  Is  not  the  new  equi- 
librium stable?  And  is  not  the  causal  sequence  precisely 
the  reverse  of  that  assigned  by  the  quantity  theory?  First, 
a  rise  in  prices;  second,  an  expansion  of  credit,  book-credit, 
notes  and  deposits;  t/iird,  money  comes  in.  If  anyone  is 
particularly  anxious  about  the  equation  of  exchange  in  this 
process,  he  may  atld  to  my  expansion  of  credit  an  increase 
in  velocities  to  keep  it  straight ! 

I  may  add  that  I  see  nothing  in  the  "transition"  I  have 
described  to  cause  trade  to  be  reduced.  Rather,  I  should 
expect  the  rising  prices  to  make  trade  more  active^or 
better,  I  should  e.xpect  the  rising  values  of  goods,  etc.,  )f 
which  rising  prices  are  the  symptom,  to  make  trade  more 
active,  particularly  as  there  would  be  an  increase  in  specu- 
lation to  bring  about  readjustments,  and  to  "discount"  the 
prosperity.  Nor  can  I  fmd  any  reason  why  trade  should  be 
reduced  below  the  old  level  in  the  new  normal  equilibrium. 
It  would  make  no  difference,  however,  if  trade  were  reduced 
either  transitionally  or  normally,  since  the  point  at  issue  is 
the  possibility  of  a  rise  in  prices  originating  from  causes  out- 
side the  equation  of  exchange,  and  conipellinr?  a  readjust- 
ment of  a  permanent  character  in  the  other  factors  of  the 


THE       PASSIVFAESS   OF   PRICES 


299 


equation.  The  quantity  theorist  is  at  liberty  to  make  this 
readjustment  in  any  way  he  pleases.  My  point  is  made  if 
he  has  to  make  the  readjustment,  and  if  the  price-level 
stays  up! 

I  have  put  my  illustration  in  an  extreme  form  to  throw 
the  whole  thing  in  relief,  and  to  make  the  demonstration 
free  from  a  host  of  complexities.  But  is  not  the  causal 
process  essentially  the  same  if  we  substitute,  say,  the 
Southern  States  for  our  island,  and  cotton  for  our  staple? 
So  long  as  the  telegraph  bringing  news  of  the  ruin  of  cotton 
production  in  India  and  Eg>pt,  with  the  higher  price  of 
cotton,  can  come  in  ahead  of  the  money  that  the  quantity 
theorist  might  imagine  rushing  in  a  race  with  it  on  the 
train  to  be  offered  for  the  cotton,  my  point  is  made.  In 
point  of  fact,  there  would  be  a  general  rise  in  prices  and 
wages  in  the  South,  which,  leading  to  an  expansion  of  credit, 
would  only  gradually  and  in  no  definite  ratio  lead  to  an 
increase  in  money  drawn  from  outside.  Buyers  outside 
would  pay,  not  with  money,  but  with  checks  drawn  on 
New  York,  and  Southern  bankers  would  use  their  dis- 
cretion as  to  how  much  actual  cash  they  would  bring  in. 
With  the  elastic  note  issue  of  our  Federal  Reserve  system, 
I  see  no  reason  to  anticipate  that  money  would  be  drawn 
to  the  South  in  an  amount  proportionate  to  the  increase 
in  prices.  Even  if  it  were,  the  causation  would  not  run 
from  money  to  prices,  and  that  is  the  point  at  issue.  If 
rising  prices  can  cause  increasing  money,  the  whole  quan- 
tity theory  is  upset,  whatever  the  proportions  involved. 

It  will  be  noted  that  my  illustration  might  be  put  partly 
in  the  form  of  the  supply  and  demand  argument.  Increas- 
ing demand  for  cotton  in  the  South  leads  to  higher  price  of 
cotton;  higher  price  of  cotton  makes  cotton-growers  richer, 
and  enables  them  to  increase  their  demand  for  imported 
goods,  for  land,  and  for  labor.    Supply  and  demand  comes 


I 


i 


T 


'I 


ill 


U 


III 


.^oo 


THi;    VAI-UF.   OF   MONKY 


into  conflict  with  the  (luuntity  theory,  and  does  not  sutTer 
in  the  conflict!  Sui)i)iy  and  demand  determine  particuhir 
prices,  and  particular  prices  determine  the  price-level! 

Xow  I  wish  to  generalize  this  point.  I  shall  show  that 
the  cjuantity  theory  conflicts  with  most  of  our  doctrines  of 
prites,  as  worked  out  in  our  systems  of  economics.  I 
shall  show  that,  in  important  cases,  the  quantity  theory 
conflicts  with  the  law  of  supply  and  demand,  with  the  iloc- 
trine  of  cost  of  production,  with  the  capitalization  theory, 
and  with  the  doctrine  of  imputation  as  worked  out  by  the 
Austrians,  whereby  the  t)rices  of  labor,  land,  and  other 
agents  of  production  rise  or  fall  with  the  prices  of  the  con- 
sumption goods  which  they  produce.  I  shall  show  the 
conllict  in  important  cases,  and  shall  show  also,  in  those 
cases,  that  it  is  not  the  quantity  theory  which  can  be  sus- 
tained. 

The  general  form  of  the  conflict  may  be  stated  for  all 
these  theories.  They  are  theories  of  the  relations  of  par- 
ticular prices,  concerned  with  showing  that  individual 
prices  are  so  related  that  they  tend  to  vary  together.  A 
rise  in  one  price,  according  to  these  theories,  tends  to  bring 
about  rises  in  others,  and  vice  versa.  The  cjuantity  theory, 
on  the  other  hand,  asserts  a  relation  among  individual 
prices  such  that  a  rise  in  one  tends  to  bring  about  a  fall  in 
others-  it  requires  a  compensatory  fall  at  one  point,  if  there 
has  been  a  rise  somewhere  else. 

Let  us  take  some  cases.  I  shall  take,  first,  the  conflict 
between  the  quantity  theory  and  the  capitalization  theory, 
as  I  can  use  the  illustration  just  given  in  connection  with 
it.  I  have,  in  a  preceding  chapter,  given  a  statement  of 
the  capitalization  theory.  It  is  a  theory  concerned  with 
the  prices  of  long-lime  goods  and  income-bearers,  as  lands, 
houses,  capital  goods  of  various  sorts  that  give  forth  their 
services  through  a  series  of  years,  stocks,  bonds,  etc.    The 


TIIK       PASSIVKNKSS   OF    PRICKS 


.iOI 


prifcs  of  things  of  this  sort.  lucording  to  the  capitalization  ' 
theory,  (lej)en(l  on  two  factors :  one,  the  money  income 
.  xpected  from  the  inconie-hoarer,  the  other,  the  prevailing 
rate  of  interest.  This  money  i  ome,  except  in  the  ^ase 
of  bonds,  commonly  depends  on  the  prices  of  the  products 
of  the  income-bearer,  or  fin  the  case  of  stocks)  of  the 
products  of  the  concrete  capital-goods  to  which  the  income- 
bcMrcr  gives  title.  If  we  may  follow  the  Austrian  division 
of  goods  into  higher  and  lower  "orders,"  or  "ranks,"  we 
may  say  that  the  prices  of  the  goods  of  higher  ranks  are  the 
capitalizations  of  the  prices  of  the  goods  of  lower  ranks 
specifically  produced  by  them.  Thus,  concretely,  if  the 
price  of  wheat  rises,  we  may  expect  the  prices  of  land 
to  rise,  if  the  rate  of  interest  remains  the  same.  If  the 
price  of  steel  rises,  we  may  expect  the  stocks  of  the  U.  S. 
Steel  corporation  to  rise,  also.  If  the  prices  of  smoke- 
less powder,  and  other  war  munitions  soar,  we  may  expect 
the  prices  of  the  stocks  of  the  corporations  involved 
to  do  precisely  what  they  have  done  in  the  recent  course 
of  the  stock  market.  All  this,  on  the  assumption  that  the 
rate  of  interest  does  not  change,  and  that  the  risk  factor 
remains  constant.  If  these  factors  vary,  the  results  will 
not  present  the  mathematical  exactitude  that  the  formula 
calls  for,  but  the  general  tendency  will  remain  the  same. 
On  the  other  hand,  if  the  incomes  remain  unchanged,  but 


'  The  cupitalizution  theory  is  l)riefly  outlined  by  Bfihm-Bawerk.  in  the 
•  riticul  and  historical  volume  of  his  KapituI  iind  Kapitahiiis  (Knglish  title 
of  the  volume,  L'apihil  and  Iiilcnst),  in  his  criticisms  of  the  theories  of  Henry 
(JeorKe  and  Turp)t.  It  has  subsciiuentK-  been  elaborated,  and  much  im- 
proved, by  Fetter,  in  his  Priiuiplcs  vf  Economics,  and,  more  recently,  has 
been  restated,  with  mathematical  formula;,  by  Fisher,  in  his  Rak  of  Interest. 
A  Hood  brief  statement  will  be  found  in  Scli^man,  Principles  of  Economics, 
ch.  on  "The  Capitalization  of  X'alue."  Fxtensive  use  has  lieen  made  of  it  by 
Wblcn.  More  rcrcntiy,  it  has  been  elaiionited  in  the  controversy  over  the 
theory  of  interest  participated  in  by  Seager,  Fisher,  Brown  and  Fetter,  in 
the  American  Economic  Rcvicu;  1912-13-14,  and  the  Quarterly  Journal  0] 
Economics,  1913. 


I 


302 


TlIE  VALUE  OF  MONEY 


» 
£ 


! 
I 


I 


I 

.   f 


Ji 


the  rate  of  interest  rises,  then  we  may  expect  the  capitalized 
prices  to  fall,  and  if  the  rale  of  interest  falls,  we  may  expect 
the  capitalized  prices  to  rise.  From  the  standpoint  of  the 
present  discussion,  I  suj)i)ose  it  might  be  fairest  and  best 
to  state  the  capitalization  theory  on  this  point  as  Fisher 
himself  states  it.  In  his  Elcmcnhiry  Principles  of  Economics 
(ed.  191 2)  after  giving  a  table  showing  in  figures  the  differ- 
ence made  in  dilTerent  capital  prices  by  different  rates  of 
interest  (p.  125)  he  states  (126):  *'If  the  value  of  the  bene- 
fits derivable  from  these  various  articles  continues  in  each 
case  uniform,  but  the  rate  of  interest  is  suddenly  cut 
down  from  5*"^  to  2}f,,  there  will  result  a  general  in- 
crease in  the  capital  values,  but  a  very  different  increase 
for  the  different  articles.  The  more  enduring  ones  will 
be  affected  the  most."  And  in  his  bot)k.  The  Rate  oi  In- 
terest: "The  orchard  whose  yield  of  apples  should  increase 
from  Si, 000  worth  to  $2,000  worth  would  itself  corre- 
spondingly increase  in  value  from,  say,  $20,000  to  some- 
thing like  840,000  and  the  ratio  of  the  income  to  the  cap- 
ital value,  would  remain  about  as  before,  namely,  s'^." 
(P.  15.)  On  the  next  page,  he  generalizes  his  notion:  "One 
cannot  escape  this  conclusion  (as  has  sometimes  been  at- 
tempted) by  supposing  the  increasing  productivity  to  be 
universal.  It  has  been  asserted,  in  substance,  that  though 
an  increase  in  the  productivity  of  one  orchard  would  not 
affect  the  total  productivity  of  capital,  and  hence  would  not 
appreciably  afTect  the  rate  of  interest,  yet,  if  the  produc- 
tivity of  all  the  capital  in  the  world  could  be  doubled,  the 
rate  of  interest  would  be  doubled.  It  is  true  that  doubling 
the  productivity  of  the  world's  capital  would  not  be  en- 
tirely without  effect  upon  the  rate  of  interest;  but  this 
eflfect  would  not  be  in  the  simple  direct  ratio  supposed. 
Indeed,  an  increase  of  the  productivity  of  capital  would 
probably  result  in  a  tlecrease,  instead  of  an  increase,  of  the 


,i 


THE   "  PASSIVENESS  OF   PRICES' 


303 


r;u.  of  interest.  To  double  the  productivity  of  capital  might 
more  than  double  the  value  of  the  capital."  {Rate  of  Interest, 
[).  16.)  '  F'lher  reiterates  this  doctrine  in  his  reply  to 
Seaj^er,  in  the  Ainerican  Economic  Raicw,  Sept.  1913,  pp. 
614  615. 

Xovv  my  concern  here  is  not  with  the  points  at  issue  as 
hetween  I'isher  and  Seager:  the  "impatience"  vs.  the 
"productivity"  theories  of  interest.  For  the  present,  I 
>hall  accept  Fisher's  doctrine  on  that  point  as  true."  I  am 
here  interested  in  Fisher's  doctrine  that  a  doubling  of  the 
general  productivity  of  capital  would  double,  or  more  than 
double,  the  prices  of  capital  instruments,  including  land. 
1  low  is  such  a  general  rise  in  prices  jjossible,  if  the  (juantity 
theory  be  true?  Is  not  this  a  rise  in  general  prices  from 
causes  out>ide  the  ecjuation  of  e.xchange?  That  Fisher 
means  the  money-prices  of  capital  goods  when  he  speaks 
of  capital-values  is  perfectly  clear.  In  the  second  quota- 
tion, he  speaks  of  "capital-value  of  840,000").  and  in  gen- 
eral, his  definition  of  value  runs  in  terms  of  price  {c.  g., 
Purchasing  Po-wer  of  Money,  pp.  34.  and  Elementary  Prin- 
ciples, p.  17).  Fisher  has  no  absolute  value  foncept  in  his 
system.  We  have  in  the  passages  cited  two  doctrines, 
both  of  which  contradict  the  quantity  theory:  (i)  that  a 
reduction  in  the  rate  of  interest  will  raise  capital-prices 
(which  are  the  largest  factor  by  far  in  the  price-level),  and 
(2)  that  an  increase  in  the  i)roduct  of  capital  goods  means, 
not  only  more  money  paid  for  the  products,  but  also  more 
money  paid  for  the  production-goods.     Incidentally,  the 

'  Italics  mini'. 

^  The  criticisms  I  should  make  of  the  present  formulations  of  the  time- 
preference  theory  uf  interest,  as  presented  by  BShm-Bawerk,  Fetter  and 
i'isher,  rest  on  the  individualistic  method  of  approach,  and  are  at  many 
!u:irtt«  ar.:!!ngn!i-i  f:-.  !hi-  rritii  i-mH  I  h;iv<'  mndf  of  the  utility  theory  nf  v.iUse, 
These  criticisms  need  not  alTect  the  (xtints  at  issue  here.  On  the  particular 
point  involved,  I  a,i;ree  with  Fisher  that  the  productivity  theory  gives  a 
wronjz  answer. 


« 


304 


TIIK    VALUE    OF   MONF.Y 


general  imputation  theory  would  cull  for  more  money  paid 
to  laborers  as  well.  How  can  all  this  he.  on  the  quantity 
theory?  And  what  can  ihe  poor  equation  of  exchange  do 
in  such  a  case,  if  money  does  not  increase,  if  bank-credit  is 
limited  by  money,  if  velocities  of  circulation  are  fixed  by 
individual  habits  and  convenience,  if  trade  increases  as  a 
consequence  of  the  increased  number  of  goods  produced, 
and  if  prices  rise?  It  will  not  help  much  to  assume  that 
the  productivity  of  gold  mines  is  doubled  also.  The  quan- 
tity of  money  does  not  depend  very  much  on  the  annual 
production  of  gold.  Besides,  money  need  not,  from  the 
standpoint  of  the  quantity  theory,  be  made  of  gold.  It 
might  be  irredeemable  Greenbacks,  fixed  in  quantity  by 
law,  or  even  dodo-bones!  Would  not  the  capitalization 
theory  apply  in  the  Greenback  Period?  I  shall  not  try  to 
solve  the  riddle.    I  am  not  responsible  for  it! 

The  conflict  between  the  capitalization  theory  and  the 
quantity  theory  may  be  more  simply  stated.  Assume  that 
the  prices  of  consumers'  goods  and  services  rise,  quantity 
of  money  and  volume  of  exchanges  remaining  unchanged. 
On  the  quantity  theory,  other  prices,  the  prices  of  pro- 
ducers' goods  and  services,  lands,  and  securities,  would 
have  to  come  down  enough  to  compensate,  in  order  that  the 
price-level  might  remain  unchanged.  For  the  capitaliza- 
tion theory,  however,  the  prices  of  lands,  securities,  and 
long  time  capital  goods  in  general  would  have  to  rise,  since 
the  incomes  on  which  they  are  based  have  risen.  Wages 
of  labor  engaged  in  making  consumers'  goods  would  also 
have  to  rise,  on  the  general  imputation  theory. 

The  quantity  theory  conflicts  with  the  capitalization 
theory.  The  quantity  theory  as  presented  by  Fisher  con- 
flicts with  the  capitalization  theory  as  presented  by  Fisher. 
Which  theory  is  true?  Would  prices  rise  thus,  or  would 
they  be  held  down  in  some  way  by  the  limitations  on  the 


TIIK    "PASSIVENESS  OF   PRICES' 


30s 


quantity  of  money?  I  hold  that  I  have  already  proved, 
in  the  reasoning  given  in  connection  with  my  hypothetical 
island,  and  in  the  case  of  the  South  with  its  cotton,  that 
the  capital-nation  theory  tendency  would  prevail.  The 
prices  of  products  rise,  and  then  the  prices  of  the  labor, 
land,  and  otlier  capital  goods  which  have  produced  them, 
rise,  the  rise  in  th  -  prices  of  the  capital  goods  behaving  in 
accordance  with  the  laws  of  the  capitalization  theory,  and 
all  of  the  rises  after  the  initial  rise  in  products  being  in 
accordance  with  the  imputation  theory  of  the  Austrians. 

This   conflict   suggests   an   interesting  point.    Various 
elements  in  our  economic  theory,  added  from  time  to  time 
by  different  writers,  have  necessarily  ccme  from  different 
philosophical  and  sociological  view-points,  and  have  behind 
them  different  philosophical,  psychological,  and  sociological 
assumptions.    The  quantity  theory,  developing,  as  shown  in 
the  chapter  on  "Supply  and  Demand  and  the  Value  of 
Money,"  largely  in  isolation  from  the  general  body  of  eco- 
nomic theory,  has  a  background  of  psychological  and  socio- 
logical assumptions  quite  different  from  that  of  many  other 
doctrines.    In  the  chap ' er  on  " Dodo-Bones,"  I  stated  these 
assumptions.    The  quantity  theory  rests  in  a  psychology 
of  blind  habit.    It  assumes  a  rigidity  in  the  social  system  such 
that  it  might  be  likened  to  a  machine,  with  a  hopper  into 
which  money  is  poured,  wliich  grinds  out  prices  at  the  other 
end.     I  set  this  in  contrast  wit.,  the  psychological  assump- 
tions underiying  the  commodity  theory  of  money.    That 
theory  rests  on  the  "banker's  psychology."    It  assumes  a 
highly  reflective  and  calculating  attitude  on  the  part  of  eco- 
nomic men,  with  the  disposition  to  look  behind  appearances 
for  the  security,  to  test  things  out.  to  get  to  bedrock  in  busi- 
ness affairs.    Now  the  capitalization  theory  likewise  assunio 
this  banker's  psychology.     In  its  refinements,  as  repre- 
sented by  the  mathematical  formulae  in  the  appendices  of 


■  r 


^06 


THE   VALUE   OF  MONEY 


Fisher's  Rale  of  Interest,  it  assumes  a  degree  of  precision  in 
business  calculation  which  few  experts  in  bond  departments 
apply,  and  which  the  highly  lluiil  and  alert  dealers  in  Wall 
Street  certainly  have  not  time  for,  even  if  they  had  that 
degree  of  mathematical  knowledge!    In  practice,  it  need 
not  be  said,  particularly  in  the  case  of  the  prices  of  lands, 
the  capitalization  theory  fmdb  its  predictions  very  im- 
perfectly realized!     But  the  two  theories,  resting  in  such 
divergent  psychological  assumptions,  may  be  expected,  a 
priori,  to  conflict.    That  they  do  conflict  is  not  remarkable. 
I  shall  show  a  similar  conflict  between  the  quantity  theory 
and  the  law  of  costs.    In  general,  the  quantiiy  theorist 
thinks  that  he  has  reconciled  his  theory  with  cost  theory 
by  pointing  out  that  reduced  costs  manifest  themselves 
in  increasing  production,  which  means  increasing  trade, 
which  should,  on  the  quantity  theory,  mean  lower  prices.^ 
I  need  not,  for  my  purposes,  analyze  this  doctrine  in  detail, 
though  I  am  disposed  to  consider  it  an  accident  that  the 
two  theories  converge  at  this  point.    For  the  present,  I 
shall  analyze  a  case  where  reducing  costs  actually  come 
as  a  consequence  of  the  reduction  in  the  volume  of  trade, 
and  inquire  whether  such  a  case  will  lead,  as  the  cost  theory 
would  assert,  to  lowered  general  prices,  or,  as  the  quantity 
theory  would  assert,  to  higher  general  prices.     The  case  is 
that  where  by  improved  methods  of  handling  goods,  it  is 
possible  to  dispense  with  middlemen.     Concretely,  assume 
that  retailers  of  milk  get  in  direct  touch  with  dairymen,  so 
that  middlemen  are  eliminated,  and  that  as  a  consequence 
the  price  of  milk  is  reduced  two  cents  a  quart.    What  of 
the  general  price-level?    T  (trade)  is  reduced.    There  are 
less  exchanges.    Volume  of  trade  does  not  mean  volume  of 
goofls  produced,  but  volume  of  exchanges.     With  a  reduced 
trade,  the  quantity  theory  must  assert  that  prices  of  com- 

'  /i.  g.,  I'ishcr,  Purchasing  Power  0/  Money,  ().  179. 


THE   "PASSIVENESS  OF  PRICES"  ,o- 

modities  other  than  milk  must,  on  the  average,  rise  not 
merely  enough  to  compensate  for  the  fall  in  milk,  but  more 
than  that,  enough  to  compensate  for  the  reduced  trade  as 
well.    But  how  can  the  other  prices  rise?    Well,  a  point 
comes  up  obviously:  the  buyers  of  milk  save  two  cents  a 
quart     They  can  spend  it  for  something  else.    This  will 
raise  the  prices  of  other  things.     But,  on  the  other  hand 
the  middlernen  now  have  less  to  spend.    They  have  ex- 
acUy  as  much  less  as  the  others  have  more,  the  extra  money 
that  milk  buyers  have  being,  in  fact,  the  money  that  the 
middlemen  would  otherwise  nave  had.    The  one  offsets 
the  other.     I  here  is.  then,  no  reason  for  the  average  of 

furl^"'?.r  '"'•  ^^^^''  ^^  '^"y  ^^  P^«^^^^  °ne  step 
further.    After  a  while,  the  middleman  will  find  other 

work  to  do.  Then  they  will  have  incomes  again  to  spend. 
But  in  going  to  work  agam,  they  will  be  engaged  in  produc 
t  on,  and  so  will,  m  general,  be  increasing  the  volume  of 
trade.  The  quantity  theorist  could  not  expect  a  rise  in 
prices  from  this!  f  c  m 

And  here  we  are  given  a  clue  to  a  fundamental  confusion 
in  the  quanuty  theory,  a  confusion  which,  accepted  by  the 
reader,  gives  the  quantity  theory  much  of  its  plausibility 
I  refer  to  the  confusion  between  volume  of  money,  and 
volume  of  money-income.^    The  two  need  not  be  the  same 
The  two  generally  are  not  the  same.    In  the  case  I  have 
described    the  one  has  changed  without  a  change  in  the 
other     Now  if  one  wishes  to  view  the  process  of  price 
causation  from  the  standpoint  of  money  offered  for  goods 
-an  essentially  superficial,^  but  frequently  useful,  view- 

nUstakes  VirtuaUy  aU  quanUty  theorists  make  both  these 


i 


308  THE  VALUE  OF  MONEY 

point— it  is  clearly  money-income,  rather  than  mere  quan- 
tity of  money  in  the  country  that  is  important.  Into  the 
determination  of  volume  of  money-income,  however,  come 
factors  of  a  high  degree  of  complexity,  among  them,  prices 
for  which  there  is  no  possible  place  within  the  conlines  of 
so  simple  and  mechanical  a  doctrine  as  the  quantity  theory. 

In  passing,  I  notice  a  point  to  which  I  called  attention 
in  discussing  Fisher's  factors  in  the  equation  of  exchange. 
I  refer  to  his  definition  of  velocity  of  circulation  as  the 
average  of  "person-turnovers"  of  money.'  In  the  illus- 
tration given,  there  is  no  reason  to  suppose  that  this  aver- 
age is  changed.  The  middlemen  simply  drop  out  of  the 
average.  They  have  no  money  to  turn  over!  But  veloc- 
ity of  circulation,  defined  as  "coin-transfer,"  {cf.  supra, 
p.  204)  has  clearly  changed.  The  course  of  money  has  been 
short-circuited.  It  goes  through  fewer  hands  in  the  course 
of  a  given  period.  This  last  concept  of  velocity  of  circula- 
tion is  clearly  the  one  that  must  be  used,  if  the  equation 
of  exchange  is  to  be  kept  straight.  But  this  fact  should 
make  it  clear  that  velocity  of  circulation,  instead  of  being 
the  inflexible  thing  that  Fisher  has  described,  resting  in 
individual  habits  and  practices,  a  true  causal  factor  in  the 
price  making  process,  is  really  a  highly  flexible  thing,  in 
large  degree  a  passive  function  of  trade  and  prices. 

With  this  distinction  between  volume  of  money  and 
volume  of  money-income  ^  clearly  held,  we  are  prepared  to 
go  further  in  our  attack  on  the  quantity  theory,  granting 

'  Supra,  chapter  on  "Velocity  of  Circulation." 

»  This  distinction  is  clearly  made  and  devcloiied  by  von  VVieser,  in  the 
two  articles  refeired  to  in  our  chapter  on  "Marginal  Utility."  It  is  used 
by  him  in  criticisms  of  the  quantity  theory.  "Der  (leldwert  und  seine 
Reschichtlichen  X'eranderunRen,"  Zeitch.  fiir  VolksuirL^cliaft,  Sosialpolilik 
mid  Verwaltung,  XIII,  1904;  discussions  in  Schriflen  drs  Vcreins  fUr  Sozial- 
politik,  igog,  no.  132.  A  similar  distinction  runs  throuRh  J.  A.  Hobson's 
Gold.  Prices  and  tt'acrs,  London.  1013.  The  present  writer  had  worked  out 
the  line  of  argument  here  presented  before  reading  either  of  these  discus- 
sions. 


THE   "PASSIVENESS  OF   PRICES"  ^OQ 

the  quantity  theorist  all  his  most  rigorous  assumptions, 
and  still  demonstrating  that  prices  can  vary  independently,' 
without  prior  change  in  quantity  of  monev,  volume  of 
trade,  or  velocity  of  money.    Let  us  assume  the  extreme 
case  of  the  quantity  theory:  a  closed  market;  no  credit;  no 
barter;  a  fixed  supply  of  money;  a  fixed  volume  of  trade; 
a  fixed  set  of  habits  aflfecting  velocity,  namelv,  that  every- 
one spends,  in  the  course  of  the  month,  all  that  he  has  ac- 
cumulated by  the  first  of  the  month.    The  quantity  theorist 
could  not  ask  a  more  iron-clad  set  of  assumptions  than  this! 
If  the  quantity  theory  is  not  valid  here,  if  the  price-level  is 
not  absolutely  fixed,  helpless  to  change,  with  these  assump- 
tions, then  the  quantity  theory,  even  as  a  minor  tendency, 
must  be  surrendered,  and  the  quantity  theorist  must  admit 
that  the  whole  line  of  thought  has  been  fallacious.    But  is 
the  price-level  passive?    Suppose  we  assume  a  combina- 
tion of  employers  of  maid-servants,  which  forces  down  the 
wages  of  maid-servants  from  $20  to  $10  per  month.    As- 
sume further  that  there  is  no  alternative  employment  for 
the  maid-servants,  so  that  they  all  remain  at  work.'    So 
far,  we  have  made  a  change  in  one  price,  the  price  of  do- 
mestic service.    What  of  the  general  average  of  prices,  the 
price-level?    WeU,    so   far,    the   price-level   is   down.    If 
nothing  else  tak-s  place,  we  have  reduced  the  price-level 
by  reducing  one  price.    What  else  can  take  place?    Two 
things:  (i)  the  masters  now  have  $10  per  month  each  more 
to  spend  for  other  things  than  before.    That  tends  to  raise 
prices  in  their  other  channels  of  expenditure.    (2)  The  maid- 
servants now  have  $10  each  less  to  spend —the  same  ten 

II  have  chosen  maid-servants,  to  avoid  complications  of  costs  of  pro- 
ducuon  m  the  reasoning  that  might  come  if  other  labor,  engaged  in  pro- 
n.Tf  Sr^'  T  ^^^  """i!^'^'  ^^'^  ^'*^^*«'-  To  tighten  the  argument  a 
f  fiT^"'  .  ^"'"""^  '^''^  ^''^  '"'^'^^^  ^"^^  t''"'  monthly  incomes  ..n 
the  first  d.ay  of  the  month;  that  they  pay  the  maids  on  the  same  day;  that 
the  rest  of  the  expenditures,  both  of  masters  and  maids,  are  strung  out 
through  the  rest  of  the  month.  «      " 


310 


THE  VALUE  OF  MONEY 


dollars!    That  lessens  prices  in  the  lines  of  their  expendi- 
ture.   These  last  two  changes  exactly  neutralize  one  an- 
other.   The  first  change,  in  the  price  of  domestic  service, 
remains  unneutralized.    The  general  price-level  is,  then, 
lowered— by  a  cause  acting  from  outside  the  equation  of 
exchange,  directly  on  prices.    The  first  change  comes  in 
one  price.    In  the  final  adjustment,  that  change  remains 
unneutralized.    How  is  this  possible?    Is  the  equation  of 
exchange  still  valid?    As  a  mathematical  formula,  yes. 
As  expressing  a  causal  theory,  in  which  prices  are  effect, 
and  money,  trade,  and  velocity  causes,  no.    The  equation 
is  kept  straight  by  a  reduction  in  velocity.    Because  the 
wages  of  maid-servants  are  reduced,  less  money  goes  through 
their  hands;  $io  per  month  per  maid  are  short-circuited. 
But  the  cause  is  with  the  prices.    The  price-level,  even 
under  these  absolutely  rigorous  assumptions,  is  not  passive. 
In  general,  I  conclude  that  the  price-level,  under  the 
laws  governing  particular  prices,  supply  and  demand,  cost  of 
production,    the    capitalization    theory,    the    imputation 
theory,  etc.,  can  vary  of  its  own  initiative,  independently 
of  prior  changes  in  the  quantity  of  money,  or  of  volume  of 
trade,  or  other  factors  that  the  quantity  theory  stresses; 
and  that  these  changes  in  the  price-level  (or  in  the  partic- 
ular prices  which  govern  the  price-level)  can  maintain 
themselves,  and  compel  a  readjustment  in  trade,  credit, 
money  and   velocities,    to   correspond.    This   conclusion 
strikes  at  the  ver>'  heart  of  the  quantity  theory,  and,  if 
valid,  leaves  the  quantity  theory  disproved.    More  funda- 
mentally, I  should  put  it,  prices  can  change  because  of 
changes   in   the   psychological   values   of  goods.    These 
values  are  social  values,  and  are  to  be  explained  only  by  a 
social  psychology.    But  for  the  present  it  has  seemed  best 
to  me,  as  a  means  of  attracting  sympathetic  attention  from 
a  wider  circle  of  economists,  to  make  use  of  the  less  debated 


THE   "PASSIVENESS  OF  PRICES' 


3" 


doctrines  of  the  science  in  attacking  the  quantity  theor>-. 
It  is  not  necessary  to  rest  the  case  on  my  own  special  theory 
of  value.  Supply  and  demand,  cost  of  production,  the 
capitalization  theory,  the  imputation  theory— the  general 
laws  of  the  concatenations  and  interrelations  of  prices— are 
quite  adequate  for  the  confutation  of  the  quantity  theory. 
They  are  laws  concerned  with  particular  prices,  and  the 
price-level  is  nothing  but  the  average  of  particular  prices. 
Whatever  explains,  really  explains,  the  particular  prices, 
also  explains  the  price-level. 

Fisher,  as  we  have  seen,  is  not  of  this  opinion.  Although 
he  has  defined  the  price-level  as  an  average  of  particular 
prices  *  he  none  the  less  exalts  this  average  into  a  causal 
entity,  prior  to  and  master  of  the  particular  prices  out  of 
which  it  is  derived,  of  which  it  is  a  mere  average."    This 

'  op.  cit.,  p.  27. 

'  A  possible  alternative  interpretation  of  Professor  Fisher's  conception  is 
suggested  in  two  or  three  sentences  in  the  passage  of  the  Purchasing  Power 
of  Money  I  have  been  discussing.  On  p.  175  he  makes  a  distinction  be- 
tween individual  prices  relatively  to  each  other  and  the  price-level.  But 
the  distinction  which  he  discusses  in  the  passage  as  a  whole  is  between 
the  price-level  and  individual  prices  not  considered  in  relation  to  each  other. 
Comparison,  moreover,  with  his  original  enunciation  of  the  notion  (Papers 
and  Discussions,  23d  ,\nnual  Meeting  of  the  American  Economic  Associa- 
tion, pp.  36-37),  would  serve  to  justify  the  interpretation  I  give,  as  nothing 
at  all  is  said  there  about  super-ratios  between  individual  prices.  But  the 
internal  evidence  is  even  more  convincing.  Demand  r  p.d  suf)ply,  and  cost 
of  production,  find  their  problem,  not  in  the  relation  between  the  money 
priie  of  aspirin  and  the  money  price  of  oiviar,  but  in  the  money-price  of 
aspirin  or  the  money-price  of  caviar  considered  separately.  Professor  fisher 
thus  conceives  supply  and  demand  in  his  Elementary  Principles  (p.  260). 
This  interpretation  is  especially  necessary,  since  Professor  Fisher  is  joinmg 
issue  with  writers  who  surely  use  demand  and  supply  and  cost  of  produc- 
tion as  means  of  explaining  money-prices,  and  not  super-ratios  between 
them.  Further,  the  price-level  is  not,  on  Professor  Fisher's  own  scheme,  a 
factor  in  determining  the  relations  of  the  prices  of  sugar  and  of  wheat  inter 
se.  With  a  given  price-level,  wheat  might  be  worth  a  dollar  and  sugar  nine 
cents,  and  the  ratio  of  their  money  equivalents  would  be  100:9;  with  a  price- 
level  twice  as  high,  wheat  would  be  worth  two  dollars,  and  sugar  eighteen 
cents,  but  the  ratio  between  their  money  equivalents  would  be  still  100:9. 
The  whole  discu.ssion  is  quite  meaningless  unless  the  contrast  be  between 
concrete  money-prices  of  particular  goods,  and  their  average.    On  either 


■ii 


312 


THE   VALUE   OF  MONEY 


average,  he  maintains,  is  presupposed  in  the  determina- 
tion of  all  particular  prices.'  This  seems  to  me  a  wholly 
untenable  position.  Ex  nihilo  nihil  fit.  There  cannot  be 
more  in  the  average  than  there  is  in  the  particulars  from 
which  it  is  derived.  In  point  of  fact,  there  is  necessarily 
vastly  less.  All  the  concrete  causation  is  lost.  The  aver- 
age, in  itself,  is  nothing  but  a  statement,  a  summary  of 
results.  I  know  nothing  more  metaphysical  in  the  his- 
tory of  economic  theory  than  this  hypostasis  of  an 
average.^ 

I  reject  Fisher's  notion  that  the  average  of  prices  is  an 
independent  entity.  But  I  do  not  consider  that  the  idea 
lying  behind  this  untenable  doctrine  is  absurd.  Cost  of 
production,  supply  and  demand,  and  the  other  price  theories 
do  presuppose  something  more  fundamental.  They  do  pre- 
suppose money,  and  the  value  of  money,  as  has  been  shown 
at  length  in  Part  I.  The  trouble  with  Fisher's  notion  comes 
in  his  definition  of  the  value  of  money  in  purely  relative 
terms  as  the  reciprocal  of  the  price-level,  and  his  contention 
that  the  study  of  the  value  of  money  is  identical  with  the 
study  of  price-levels.'    Value  is  not  a  mere  exchange  rela- 

interpretation,  moreover,  my  criticism  of  the  exalting  of  the  average  into 
an  entity  would  stand. 

II  Purchasing  Power  of  Money,  pp.  175-179. 

=  I  am  glad  to  find  myself  in  agreement  with  Professors  Laughlin  and 
Kemmerer  m  holding  that  this  notion  of  Professor  Fisher's  is  untenable. 
•'The  distmction  Professor  Fisher  draws  between  the  prices  of  individual 
commodities  and  the  general  price-level  appears  to  me,  as  to  Professor 
Laughhn,  to  be  untenable.  It  is,  moreover,  contradictory  to  his  general 
philosophy  of  money.  His  index  numbers  recognize  no  general  price-level 
distinct  from  individual  prices.  .  .  .  Professor  Fisher's  illustraUon  of 
the  ocean  would  be  more  apposite  if  he  called  it  a  lake  whose  level  was 
continually  changing,  and  if  he  considered  each  particular  wave  as  extend- 
ing to  the  bottom."  Kemmerer,  Papers  and  Discusswns,  2^d  Annual  Meet- 
ing of  the  American  Economic  Association,  p.  53.  At  the  same  time,  I 
agree  with  Professor  Fisher  that  there  must  be  something  more  funda- 
mental than  the  particular  prices  to  make  the  scheme  work.  This  some- 
thing I  find  in  the  absolute  value  of  money. 
'  Loc.  cit.,  p.  14. 


THE      PASSIVENESS  OF  PRICES' 


3^3 


tion.*    Rather,  every  exchange  relation  involves  two  values, 
the  values  of  the  two  objects  exchanged.    These  two  values 
causally  determine  that  exchange  relation.    In  the  case  of 
particular  prices,  then,  we  must  consider  not  only  the  value 
of  goods,  but  also  the  value  of  money.    And  the  causes  de- 
termining the  general  price-level  will  therefore  include  not 
alone  the  values  of  goods,  but  also  the  value  of  money.    In 
the  foregoing  arguments  by  which  I  have  shown  that  the 
price-level  can  vary  independently  of  the  other  factors  in  the 
quantity  theory  scheme,  I  have  been  concerned  only  with 
changes  in  the  values  of  goods,  measured  by  a  constant  unit 
of  value.    If  the  value  of  money  should  also  be  varying,  the 
concrete  results  on  the  price-level  would  have  been  different. 
On  the  face  of  things,  there  was  nothing  in  the  cases  I  dis- 
cussed to  require  us  to  suppose  that  the  value  of  money 
would  also  vary.    The  argument  ran  on  the  assumption  of  a 
fixed  value  of  money.  I  have  shown,  in  earlier  chapters,  that 
the  assumption  of  a  fixed  value  of  money  is  fundamental 
to  the  laws  of  supply  and  demand,  cost  of  production,  and 
the  capitalization  theor>'.    In  point  of  fact,  this  assump- 
tion is  rarely  true— never  strictly  true.    For  causes  which 
are  in  considerable  degree  independent  of  the  causes  gov- 
erning the  values  of  goods  (as  the  causes  governing  their 
values  are  in  considerable  degree  independent  of  one  an- 
other), the  value  of  money  varies,  now  in  the  same  direction 
as  the  values  of  goods  in  general,  now  in  an  opposite  direc- 
tion.    Further,  money  itself  does  not  escape  the  general 
laws  of  concatenation  of  values.    The  value  of  money  has 
causes  which  are  bound  up  with  the  values  of  other  goods. 
Thus,  when  prices  are  rising  and  trade  expanding,  there  is 
a  tendency— commonly  a  minor  tendency— for  money  also 

'Cy.  Social  Value,  chs.  2  and  ir,  and  "The  Concept  of  Value  Further 
Considered,"  Quart.  Jour,  of  Econ.,  Aug.,  1915.  See  also,  supra,  the  chs.  on 
"Value,"  "Supply  and  Demand,"  "Cost  of  Production,"  and  "Capitaliza- 
tion." 


314 


THE   VALUE  OF  MO>fEY 


to  rise  in  value,  and  so  prices  do  not  ro  quite  as  high  as  they 
would  have  gone  had  money  remained  constant.  This 
tendency  arises  from  the  fact  that  there  is  more  work  for 
money  to  do  in  a  period  of  active  trade  and  rising  prices. 
Gold  also  tends  to  rise  in  value  in  the  arts,  with  prosperity. 
The  reverse  tendency  manifests  itself  when  prices  are  fall- 
ing: money  tends,  in  some  measure,  to  fall  in  value  with 
the  goods,  >  and  so  prices  do  not  fall  as  far  as  they  would 
fall  if  money  remained  constant.  But  in  general,  the 
causes  governing  the  values  of  goods,  and  the  causes  govern- 
ing the  value  of  money,  are  sufficiently  independent  to 
justify  us  in  studying  each  separately,  in  abstraction,  on 
the  assumption  that  the  other  is  unchanged.  Hence, 
supply  and  demand,  cost  of  production,  and  the  other 
price  theories,  which  assume  a  fixed  value  of  money,  are 
proper  tools  of  thought  for  the  study  of  the  prices  of  goods. 

'  This  tendency  may  be  more  than  offset  by  the  increasing  significance  of 
money  as  a  "bearer  of  options"  or  "store  of  value"  in  periods  of  panic  and 
depression.  See,  infra,  the  chapter  on  "The  Functions  of  Money,"  and 
Davenport,  Economics  of  Enterprise,  pp.  301-03. 


CHAPTER  XVI 

THE  QUANTITY  THEORY  AND  INTERNATIONAL 
GOLD  MOVEMENTS 

The  quantity  theory  explanation  of  international  gold 
movements  is  as  follows:  if  money  comes  into  a  country,  it 
raises  prices.    If  the  price-level  of  the  country  is  raised 
more  rapidly  than  the  price-levels  of  other  countries  are 
rising,  then  the  country  becomes  a  bad  place  in  which  to 
buy  and  a  good  place  in  which  to  sell;  its  exports  fall  off, 
its  imports  increase,  and  finally  the  inflow  of  money  is 
checked,  and,  perhaps,  money  flows  out  again.    The  equi- 
librium of  the  gold  supplies  of  different  countries  is  thus 
dependent  on  the  price-levels  of  the  countries  involved. 
The  quantity  of  gold  in  a  country  determines  its  price-level, 
and  no  more  gold  can  stay  in  a  country,  on  this  theory, 
than  that  amount  which  keeps  its  price-level  in  proper  rela- 
tion to  the  price-levels  of  other  countries.    It  is  not  neces- 
sarily asserted  that  the  price-levels  of  all  countries  must  be 
equal— the  facts  too  obviously  contradict  that.    But  when 
this  precise  statement  is  not  made,  the  substitute  state- 
ment of  some  "normal"  relation  between  the  price-level 
of  one  country  and  that  of  another  becomes  a  very  vague 
one,  and  the  theory  becomes  pretty  indefinite. 

I  am  here  concerned  chiefly  with  one  contention:  the  price- 
level,  the  average  of  prices,  is  not  a  cause  of  anything— not 
of  gold  movements  or  anything  else.  It  is  a  mere  sum- 
mary of  many  concrete  prices.  Some  of  these  concrete 
prices  have  highly  important  influence  on  international 
gold  movements,  tending,  if  they  are  low,  to  bring  gold  in, 
and  if  they  are  high,  to  repel  gold.    Others  work  in  the 

31S 


t  n  '■ 

I  ■'  r 

IK;  I 
■ 
.  Mr 


^l'> 


THE   VALUE   OF   MONEY 


«)I)jMisiti  Hircctjn?  .  tornlirif;  if  they  arc  low  to  attract  l(>>  gold 
than  it  tht-y  arc  bigh.  linully  ;irii(»n«  iill  the  {)ritfs  atTccting 
international  gold  movements,  the  one  which  is  most  signili- 
lant  is  commonly  not  iticluded  in  the  price-level  at  all:  I  re- 
fer t(j  the    price  ol  money.'  tht  short-lime  interest  rate. 

Let  me  elaborate  each  poii/.  First,  it  is  true  that  high 
prices  of  articles  which  "nter  easily  into  international 
trade  tend  to  repel  >;old  from  the  country  meaning  by 
*'hiph  prices"  prices  that  are  higher  than  ilie  prices  of  the 
same  g(«Kis  abroad.  This  relate^,  however,  not  to  the 
general  pma?-ievel,  but  only  to  a  comparatively  small  set 
of  prices.  Most  prices  in  a  country  are  not  prices  of  articles 
of  internitiional  trade.  High  wages  may,  indeed,  draw  in 
immigrant.-  But  high  land  rents,  and  high  prices  of  land 
cannot  bring  in  land.  Xor  do  high  land  prices  send  away 
much  gold  t(.  other  countries  for  the  purchase  of  land 
there.  Indeed,  within  a  single  country,  the  dilTerences 
in  the  relation  between  land  yield  and  capital  value  of  land 
are  enormous.  The  following  figures  are  taken  from  an 
article  by  J.  !•:.  Pope:  '  In  Vazoo  Co.,  Mississippi,  farm 
lands  are  sold  at  Sio  to  S25  per  acre.  The  average  gross 
income  per  acre  is  S.'8.  In  Cass  Co.,  Iowa,  the  land  prices 
arc  from  Sioo  to  Si 25  per  acre  while  the  gross  income 
amounts  to  only  vSn  per  acre,  if  only  crops  and  dairy 
products  are  taken  into  account,  and  to  $20  if  the  sales  of 
live  stock  are  included.  In  Oglethorpe  Co..  Georgia,  the 
average  price  is  from  Sio  to  S25  per  acre,  and  the  average- 
income  $10.  In  Paulding  Co.,  Ohio,  land  is  sold  at  from 
S75  to  $100  per  acre,  and  the  average  income  i)er  acre,  in- 
cluding returns  from  live  stock  sold,  is  Si^,  Why  should 
not  landowners  in  Cass  County,  Iowa,  sell  their  compara- 
tively unproductive  land,  at  a  high  i)rice,  and  go,  with 

'  ".\gricultur;il  Credit  in  the  United  States,"  Quart.  Jour,  of  Econ.,  .Vug., 
igi4,  p.  708,  n. 


THfc   Vl.WriTY   THIORY   AND  GOI.U   MOVKMENTS       J17 

(heir  money,  to  Ycizoo  ("oiuUy,  Mississippi?    Thi-  answer 
is  simply,  that  they  woulii  have  to  j,'o  'with  their  money,  and 
they  prefer  to  stay  at  home!     Absentee  landlordism  is  not 
generallN   popular  with  men  who  arc  seeking  paying  in- 
vestments.    L;iii(l  stands  at  one  extreme.     But  then  land 
is  the  very  biggest  item  in  an  inventory  of  wealth,  and, 
while  not  as  laud,  actively  bought  and  sold.'  it  is  a  big  ele- 
ment in  the  \alucs  of  many  active  securities.     The  prin- 
( iple  hold.-  in  less  degree  of  many  other  things,  however. 
'I'he  securities  of  a  local  corjxjration.  say  a  gas  plant,  find 
tluir  best  market  at  home,  as  a  rule,  unless  the  city  be 
large.     If  the)-  are  held  by  foreign  capitalists,  they  still 
hnd  a  very  restricted    nirket  in  the  foreign  country.    Only 
ihose  who  have  investigated  at  first  hand  will  feel  free  in 
buying  them     unless,  indeed,  they  are  guarantee<l  in  some 
way  by  a  big  and  well-known  house.     Prices  of  personal 
and    professional   services   var>-   enormously  in   difTerent 
sections  of  the  same  country,  to  say  nothing  of  variations 
between  difTerent  countries,  and  there  is  a  very  slow  move- 
ment indeed  toward  bringing  about  higher  salaries  for  rural 
preachers    in    Kansas    because    the    salaries    of    London 
preachers  have  risen,  or  because  of  increased  demand  for 
preachers  in  Germany.    Great  numbers  of  commodiUes  are 
too  bulky  to  move  far.    Their  prices  var>'  with  little  relation 
to  similar  prices  elsewhere     But  the  principle  needs  no  more 
elaboration.    If  the  reasoning  be  simply  that  men  tend  to 
buy  where  things  are  cheap,  and  to  sell  where  things  are 
dear,  it  is  clear  that  that  establishes  a  very  loose  relaUon  in- 
deed between  the  price-levels  of  different  countries. 

The  second  point  is  that  some  prices,  by  rising,  actu-Jly 
bring  in  gold  from  abroad,  while  by  falling  they  tend  to  re- 

anSv  ^"^    M^'""'  '^Tf^'  ''"^'^  ^S-  "'  ^^'*=  ''^^^^  being  sold 
annually.    The  Missis.s,,,,,,  l„nd>,  are  much  less  active.    I  am  indebted  to 

Ur.  Pope  for  informalKin  riKarding  Iowa  on  this  point. 


i  i 


■  I 

'I 

I 


ii 


318 


THE   VALUE   OF  MONEY 


lease  gold.    I  am  not  here  refe-ring  to  the  case  discussed  in 
the  chapter  on  "Supply  and  Demand, "  where  a  commodity, 
cotton,  with  an  inelastic  demand,  is  doubled,  the  doubled 
quantity  selling  for  a  less  aggregate  price,  and  so  bringing 
in  less  money  from  abroad.     That  case  would  bear  con- 
siderable generalization.    I  am  referring  here  to  the  case 
where  credit  is  built  on  the  value  of  long  time  goods,  as 
lands,  or  railroads.     Concretely,  let  us  suppose  an  increase 
in  railroad  rates  allowed  by  the  Public  Service  Commission 
of  Missouri.    This  is.  in  itself  a  rise  in  prices.     It  will, 
further,  on  the  capitalization  theory,  make  the  prices  of 
stocks  of  the  roads  operating  in  the  State  rise  also,  and  give 
a  margin  of  additional  security  for  bond-issues.    This  will 
make  it  possible  for  these  roads  to  float  foreign  loans  (or 
would  have  done  so  before  the  War),  and  so  will  tend  to 
turn  the  exchanges  in  our  favor.     Gold  will  tend  to  come 
in.  not  to  go  out.    Similarly  if  the  prices  o*"  dairy  products, 
or  truck  gardens,  or  orchards,  or  orange  gr..  ,  s  rise,  leading 
to  a  rise  in  the  prices  of  the  lands  involved,  foreign  caj  "tal 
will  tend  to  come  in  as  loans— i.  e.,  the  exchanges  will  turn 
more  favorable  to  us,  and  the  gold  movement  tend  to  turn 
our  way.     I  suppose,  by  the  way,  that  something  of  a  point 
could  be  made  against  the  Single  Tax  at  this  point:  destroy- 
ing land  values  would  lessen  the  security  which  a  com- 
munity could  ofTer  outside  lenders.    The  Single  Tax  would, 
thus,  hamper  the  development  of  countries  which  need 
capital  from  outside.     Men  who  wish  to  use  their  own 
capital,  under  their  own  management,  might,  as  the  Single 
Taxers  claim,  be  tempted  to  come  in,  if  they  could  be  free 
from  taxation  on  the  capital  they  bring  with  them;  but 
lenders,  who  wish  a  good  margin  of  security,  would  ftnd  less 
inducement  to  lend.'     This  is  a  digression,  but  one  feature 

'  The  Single  Taxer  could  al  least  retort  that  this  need  not  protect  land- 
lords in  countries,  like  England,  which  lend  surplus  capital  abroad. 


THE   QUANTITY  THEORY  AND  GOLD  MOVEMENTS     319 

of  it  is  pertinent:  though  the  foreigner  does  not  care  to 
migrate  from  his  high-priced  land  to  iow-prked  land  else- 
where, he  is  often  willing  to  trust  a  loan  to  the  owner  of 
///^//-priced  land  elsewhere.    I  will  not  venture  the  generaU- 
zation  that  high-priced  land  necessarily  attracts  loans,  and 
tends  to  turn  the  gold  movements  in  favor  of  the  country 
where  prices  are  high.    The  point  ha^  been  made  that  if 
lands  are  being  exchanged  frequently,  the  new  buyer  ccnds 
to  exhaust  his  credit  resources  in  paying  for  the  land:  i.  e., 
puts  so  large  a  mortgage  on  it  that  he  has  Uttle  margin  of 
security  to  offer  for  working  capital.'    I  shaU  not  here 
undertake  to  determine  how  far  as  a  matter  of  fact,  in 
dilTerent  places,  the  one  tendency  outweighs  the  other.     It 
is  enough  to  point  out  that  in  many  cases,  where  this  factor 
is  absent  (as  in  the  case  of  the  railroads  cited),  rising  prices 
attract,  and  do  not  repel,  foreign  gold,  and  that  for  none  of 
these  cases  is  the  consequence  of  rising  prices  for  the  gold 
movements  to  be  explained  in  the  simple  way  that  the 
quantity  theory  doctrine  would  require. 

Finally,  the  international  movements  of  gold  ^  are 
enormously  moved  by  the  short-time  rate  of  interest.  The 
raising  of  the  Bank  Rate  in  England,  supplemented,  when 
necessary,  by  "borrowing  from  the  market"  by  the  Bank 
of  England,  as  a  means  of  making  the  Bank  Rate  eflfective, 
quickly  turns  the  course  of  the  exchanges.  This  is,  as  has 
been  pointed  out,  a  more  effective  device  when  used  by 
the  English  money-market  than  when  used  by  borrowing 
countries,  since  the  borrower,  by  offering  higher  rates,  is 
not  always  able  to  borrow  more,  whereas  the  lender,  by 
demanding  higher  rates,  is  usually  able  to  reduce  his  loans. 

'Cy.   Trosien.   Der  land-wirtsdiafUkhe  Kredit  und  seine  dunhgreifende 
Vcfbesserung,  p.  2q,  citetl  by  J.  K.  Pope,  loc.  cit.,  p.  705,  n 

JJmi  ""■''  "^^  ^'^'  ?!'"•/'''■'■"">'«.  Bk.  III.  ch.  V  iii,  par.  4).  and  has  been 
cs|)cudlly  emphasued  l>y  LauRhlin,  Principles  0/  Afonev,  ch.  10.  Cf  A  C 
\\  hitaker  s  discussion  in  the  Qiiarl.  Jour,  of  Econ.,  Feb.  1904. 


320 


THK    VALl'K   OF   MONEY 


:   } 
) 


But  the  difference  is  one  of  degree,  and  in  point  of.  fact  a 
rise  in  the  short  time  rates  in  New  York  City  is  commonly 
an  effecti\e  means  of  bringing  in  gold  from  abroad.     It  is 
true  that  this  is  not  the  only  factor.     I  have  been  at  pains 
to  point  out  how  other  factors  work.    I  am  as  far  as  pos- 
sible from  denying  the  powerful  influence  of  the  "balance 
of  trade"  as  treated  by  the  older  economists  on  interna- 
tional gold  movements,  when  both  visible  and  invisible 
items  are  included.     But  my  point  is,  first,  that  these  in- 
visible items  are  numerous  and  flexible,  and  that  a  big  fac- 
tor in  their  determination  is  the  short  time  rate  of  interest; 
and  second,  that  the  balance  of  physical  items,  even,  de- 
pends, not  on  the  price-level  as  a  whole,  but  merely  on  the 
prices  of  those  particular  goods  which  enter  into  foreign 
trade.     It  is  perfectly  possible,  and,  indeed,  is  very  com- 
mon, for  rising  prices  in  a  countr>-  to  lead  to  expanding 
trade  and  expanding  bank-credit,  which  causes  bankers  to 
wish  to  expand  their  reserves,  which  leads  them  to  raise 
their  rates  on  short  time  loans,  which  leads  gold  to  come 
in   from   abroad.    More  simply  still,   the   bankers  may 
merely  offer  an  attractive  rat*^  to  the  foreign  bankers,  and 
establish  credits  abroad,  against  which  they  draw  "finance 
bills,"  which  influence  the  gold  movements  in  the  desired 
manner. 


N 

H 


CHAPTER  XVII 

THE  QUANTITY  THEORY  vs.  GRESHAM'S  LAW 

There  is  a  pretty  obvious  conflict  between  the  quantity 

theory  and  Gresham's  Law.    The  latter  is,  essentially,  a 

''quality"  theory  of  money.    For  the  quantity  theory 

dodo-bones,  or  anything  else  will  do.     "It  is  the  number, 

nd  not  the  weight,  that  is  essential"!'    For  Gresham's 

Law,  the  weight  makes  all  the  difference  in  the  world,  if  it 

is  a  question  as  between  full  weight  and  light  weight  coins, 

and.  in  general,  the  value  of  the  thing  of  which  money  is 

made,  considered  in  its  commodity  aspect,  is  the  starting 

point  of  that  doctrine. 

The  quantity  theorist  seeks,  indeed,  to  harmonize  the 
two.   His  theory  is  that  Gresham's  Law  manifests  itself  only 
when  there  is  a  redundancy  of  the  currency  due  to  the  issue  ^ 
of  paper  money,  or  overvalued  metal.    In  such  a  case, 
prices  rise,  he  holds,  and  then  the  undervalued  metal,  or 
the  metallic  currency,  which  coun'.  no  more  than  the  paper 
or  the  overvalued  metal  in  circuLtion,  tend  to  leave  the 
country,  to  another  country  where  prices  are  lower,  or 
tend  to  leave  the  money  use  for  the  art's.     But  the  quantity 
theorist  must  maintain  that  it  is  only  via  increased  issue, 
with  consequent  rising  prices,  that  Gresham's  Law  comes 
into  operation.     If  the.c  are  a  million  dollars  of  gold  in 
circulation,  and  a  half  million  of  irredeemable  paper  is 
added,  then  only  half  a  million  of  the  gold  (or  rather  a  litUe 
less  than  half)  will  leave.    If  more  than  that  left,  prices 
would  fa!!,  because  of  the  scarcity  of  money,  and  then  the 

'  Supra,  p.  124,  and  ch.  on  "Dodo-Bones." 
321 


>•  i  I.  », 


>.^ 


■■1 


322 


THE  VALUE  OF  MONEY 


gold  would  come  back,  because  it  would  be  worth  more  in 
concurrent  circulation  with  the  paper  than  it  would  be 
worth  as  money  abroad,  or  in  the  arts.  On  the  quantity 
theory,  there  can  be  no  difference  in  the  value  of  gold  and 
paper,  in  such  a  case,  after  enough  gold  has  left  to  balance 
the  paper  that  has  been  issued.  Falling  prices  would  pre- 
vent it. 

But  Gresham's  tw  is  not  held  by  any  such  fetters! 
And  the  facts  of  monetary  history,  in  important  cases, 
show  Gresham's  Law  controlling,  dcrpite  the  quantity 
theor>'.     I  will  refer  briefly  to  two  such  cases. 

The  first  centres  about  the  suspension  of  specie  pay- 
ments by  the  Northern  banks  and  the  Federal  Treasury  on 
Januarj'  i,  1862.  This  suspension  was  not  accompanied  by 
any  increase  of  money.  Rather,  there  was  a  decrease,^ 
shortly  following,  in  the  amount  of  paper  money.  The 
banks  in  New  York,  and  certain  other  States,  were  bound  so 
strictly  by  their  charters,  and  by  the  State  laws,  that  they 
da  ed  not  leave  their  notes  unredeemed.  Speculators,  buy- 
ing notes  at  a  discount— for  virtually  all  bank-notes  fell  to  a 
discount— were  able  to  present  them  to  the  banks  in  these 
States  and  demand  gold,  which  led  to  a  very  profitable 
business.  The  banks  protected  their  gold  by  ceasing  to 
issue  notes,  or  by  reducing  the  volume  of  note  issue.  Cer- 
tified checks  were  used  to  a  considerable  extent  instead. 
There  was  certainly  no  increase,  and  probably  a  reduction, 
a  considerable  reduction,  in  the  volume  of  bank-notes  in 
circulation.  The  only  other  paper  money  in  circulation 
was  the  Demand  Notes  of  the  Federal  Government,  which 
were  not  increased  after  the  date  of  the  suspension,  an 
which  were  in  any  case  small   in  volume  as  compared 

'  The  Comptroller  of  t\.e  Currcncv  estimates  the  State  h:ink-nntis  in 
1861  at  202  millions;  in  i86i,  at  1S3  millions.  Report  of  the  Comptroller  of 
the  Currency,  1915,  vol.  II,  p.  37. 


THE  QUANTITY  THEORY  VS.   GRESHAM's  LAW         323 

With  the  total  amount  of  money.    On  the  quantity  theory 
version  of  Gresham's  Law,  there  was  nothing  to  drive  gold 
out     Gold  vvas  not  pushed  out  by  redundant  currency. 
Kather,  it  left,  leaving  a  monetary  vacuum  behind     Co- 
inadently,  strangely  enough,  prices  rose.    The  vacuum  in 
the  money  supply  was  so  serious,  that  the  subsequent  first 
issue  of  the  Greenbacks  brought  a  welcome  reUef.  Through- 
out the  whole  of  the  first  year  of  the  suspension,  the  volume 
of  money  was  less  than  it  had  been  in  the  preceding  year 
None  the  less,  the  gold  stayed  out  of  general  drculaUon. 
it  did  not  come  back  from  abroad.    And  prices  rose.' 

A  sxnular  episode,  the  obverse  of  this,  occurred  when  the 
r  ,      'lEngland  resumed  specie  payments  in  the  early 
20  s.    Then  gold  came  back,  the  currency  was  increased, 
and,  comcidently,  prices  fell.^ 

I  conclude  that  the  conflict  between  Gresham's  Law  and 
the  quaiiUty  theory  is  real  and  fundamental,  and  that  in 
cases  where  different  qualities  of  money  are  in  concurrent 
circulation,  the  undervalued  money  wiU  leave,  regardless 
01  the  question  of  quantity. 

^^  Conant,  Modrrn  Banks  of  Issue  Ww  Vr^rt.   to^a  .,  »     • 


,. 


I  f 


CHAPTER  XVIII 
THE  QUANTITY  THEORY  AND  "  WORLD  PRICES  " 

Some  writers,  who  would  call  themselves  quantity 
theorists,  would  repudiate  many  of  the  doctrines  for  which 
Fisher  stands,  and  which  the  historical  quantity  theory 
involves.  The  recognition  which  Fisher's  book  has  re- 
ceived from  quantity  theorists  generally,  justifies  me  in 
treating  his  book  as  the  "official"  exposition  of  the  modem 
quantity  theory,  and,  indeed,  it  is  easy  to  show  that  Fisher 
is  fundamentally  true  to  the  quantity  theory  tradition. 
With  many  writers,  the  disagreement  with  Fisher  would 
be  a  mere  matter  of  degree;  they  would  hold  that  Fisher 
has  set  forth  the  central  principle,  that  his  qualitative 
reasoning  is  correct,  but  that  the  relations  among  the  fac- 
tors in  his  equation  are  less  rigid  than  he  maintains.  As  I 
reject  even  the  qualitative  reasoning  by  which  Fisher  de- 
fends his  doctrine,  and  reject  even  the  qualitative  tendency 
which  he  maintains,  my  criticisms  will  apply  as  well  to  the 
position  of  this  group  of  writers,  though  I  should  have  less 
practical  diflferences  with  them,  to  the  extent  that  they 
admit  qualifications  and  exceptions  to  Fisher's  doctrine. 

There  is,  however,  a  group  of  writers  who  seem  to  feel 
that  the  quantitj'  theory  remains  sufficiently  vindicated 
if  it  can  be  shown  that  an  increase  in  gold  production  tends 
to  raise  prices  throughout  the  world,  while  a  check  on  gold 
production  tends  to  lower  prices,  and  who  rest  their  case 
on  the  necessity  which  bankers  find  of  keeping  reserves  in 
some  sort  of  relation  to  the  expansions  of  bank-credit. 

A  view  of  this  sort  is  presented  by  J.  S.  Nicholson,  whose 

324 


THE   QUANTITY  THEORY  AND  "WORLD  PRICES"     325 

Statement  of  the  application  of  the  quantity  theory  to  the 
modern  world  differs  almost  toto  coelo  from  his  original 
statement  in  the  dodo-bone  illustration  already  discussed 
Nicholson'   declares   that   in   our  modern   society   "the 
quantity  of  standard  money,  other  things  remaining  the 
same,  determines  the  general  level  of  prices,  whilst,  on  the 
other  hand,  the  quantity  of  token  money  is  determined  by 
the  general  level  of  prices."    Nicholson's  reasoning  is 
substantially,  as  follows:  Although  the  bulk  of  exchanging 
is  earned  on  by  means  of  credit  devices,  there  is  still  a 
certam  part  of  exchanging,  especially  in  the  matter  of  pay- 
mg  balances,  for  which  standard  money  only  can  be  used 
He  regards  the  whole  credit  system  as  based  on  standard 
money,  and  says  that  for  any  given  level  of  prices  there  is  a 
mmimum  amount  of  standard  money,  absolutely  demanded 
If  the  volume  of  standard  money  falls  below  this  minimum 
the  price-level  will  fall  to  such  a  point  that  the  volume  of 
standard  money  is  again  adequate.    He  takes,  moreover 
a  world-wide  view,  declaring  that  it  is  the  relation  between 
the  volume  of  gold  money  throughout  the  world  and  the 
demand  for  standard  moiiey  throughout  the  world  which 
determines  the  relative  values  of  money  and  commodities. 
The  measure  of  values  or  the  -eneral  level  of  prices 
throughout  the  world  will  be  so  adjusted  that  the  metals 
used  as  currency,  or  as  the  basis  of  subsUtutes  for  currency 
will  be  just  sufficient  for  the  purpose.    We  see  then,  that 
the  value  of  gold  is  determined  in  precisely  the  same  manner 
as  that  of  any  other  commodity,  according  to  the  equation 
between  supply  and  demand." 

In  the  consideration  of  this  doctrine,  let  us  note  several 
points  m  which  it  differs  fundamentally  from  the  quantity 
theory  proper,  and  from  the  situation  assumed  in  the  dodo- 
bone  illustration.    First,  it  is  not  a  quantity  theory  of 

'  Money  and  Monetary  Problems,  p.  ,05,  and  preceding. 


m 


326 


THE  VALUE  OF  MONEY 


money.    Money  is  not  regarded  as  a  homogeneous  thing, 
each  clement  having  the  same  influence  on  prices.    Rather, 
token  money  is  the  child  of  prices.    This  doctrine  would  in 
no  way  fit  in  with  the  logic  of  the  equation  of  exchange,  as 
presented  by  Fisher.    Further,  the  dodo-bone  idea  is  en- 
tirely gone.    Gold,  a  commodity  with  value  in  non-mone- 
tary emplo>Tnents,  is  under  discussion,  and  it  is  the  quan- 
tity of  gold  that  is  counted  significant.    This  recognizes, 
if  not  the  need,  at  least  the  existence,  of  a  commodity 
standard.    Nicholson  definitely  avows  the  necessity  for 
the  redemption  of  representative  money,  even  going  so  far 
as  to  say  that  "all  credit  rests  on  a  gold  basis,"  »  that  aU 
instruments  of  exchange  derive  their  value  from  the  vol- 
ume of  standard  money  which  supports  them,  and  that  if 
this  basis  were  cut  away  the  whole  structure  would  fall. 
Nicholson  recognizes,  further,  that  gold  has  value  inde- 
pendent of  its  use  as  money.' 

In  evaluating  Nicholson's  doctrine,  I  wish  to  point  out, 
first,  the  inaccuracy  of  the  statement  that  all  credit  rests 
^  on  a  gold  basis.  It  is  true  that  credit  instruments  are 
conmionly  drawn  in  terms  of  standard  money,  which  is 
commonly  gold.  International  credit  instruments  may 
even  specify  gold,  and  the  same  thing  happens  at  times 
within  a  country.  But  commonly,  in  this  connection, 
gold  functions,  not  as  the  value  basis  lying  behind  the 
credit  instrument,  the  existence  of  which  justifies  the  ex- 
tension of  the  credit,  bvit  rather  as  the  standard  of  deferred 
payments,  by  means  of  which  the  credit  instrument  may  be 
made  definite.  The  real  basis  of  the  value  of  a  mortgage 
is  not  a  particular  sum  of  gold,  but  rather  the  value  of  the 
farm,  expressed  in  terms  of  gold.  The  basis  of  a  bill  of 
exchange  is  not  a  particular  sum  of  gold,  but  rather  is  the 
value  of  the  goods  which  changed  hands  when  the  bill  of 


'  .Nicholson,  loc.  cit.,  84ff. 


*Ibid.,  76ff. 


THE  QUANTITY  THEORY  AND   "WORLD  PRICES"     327 

exchange  was  drawn,'  supplemented  by  the  other  posses- 
sions of  drawer,  drawee,  and  the  endorsers  through  whose 
hands  it  has  gone.    Even  a  note  unsecured  by  a  mortgage, 
or  not  given  in  payment  for  a  particular  purchase,  is  based, 
In  general,  on  the  value  of  the  general  property  of  the  man 
who  gives  it,  and  on  the  value  of  his  anticipated  income.' 
So  throughout.    Credit  transactions,  for  the  most  part, 
originate  in  exchanges,  and  carry  their  own  basis  of  security 
in  the  goods  and  securities  which  change  hands,  not  in  that 
small  fraction  of  the  world's  wealth,  the  stock  of  gold, 
which  could.  Coin  Harvey  asserted  in  the  middle  '90's,  be 
put  in  the  Chicago  grain-pit!    And  now  let  me  extend  this 
idea.    Although  coin  made  from  the  standard  of  value  is 
a  great  convenience,  there  is  yet  no  vital  need,  in  theory, 
for  a  single  dollar,  pound  or  franc  made  from  the  standard 
of  value.    If  gold  should  cease  entirely  to  be  used  as  a 
medium  of  exchange,  or  in  bank  or  government  reserves,  if 
the  gold  dollar  should  become  a  mere  formula,  so  many 
grains  of  gold,  without  there  being  any  coins  made  of  it, 
still,  so  long  as  that  number  of  grains  had  a  definite,  ascer- 
tainable value,  commensurate  with  the  value  of  some  other 
commodity  which  could  be  used  as  a  means  of  paying 
balances  and  redeeming  representative  money,  the  gold 
dollar  could  still  serve  as  a  measure  and  standard  of  values. 
In  the  situaUon  I  have  assumed,  silver  bullion,  at  the  mar- 
ket ratio,  could  perform  all  the  exchange  and  reserve  func- 
tions now  performed  by  gold,  even  though  not  so  conven- 
iently.3    Nicholson's  description  of  the  use  of  gold  as  a 
reserve,  while  calling  attention  to  an  important  fact,  has  led 

'  Cf.  Laughlin,  J.  L.,  Principles  of  Money,  and  Scott,  \V.  A.,  Money  and 
Banking. 

» (■/.  infra,  our  discussion  of  credit.    It  is  not  maintained  that  credit 

needs  to  be  based  on  physical  goods,  but  it  is  maintained  that  credit  is  based 

on  values,  whith  are  Kciierally  not  the  value  of  a  sum  of  Rold. 

...'/.*^«*  ^•*'^'^^"'  *•»'*  ""''on  «n  a  hjTxithetical  case  in  the  chapter  on 

Uodo-Bones.    to  which  I  would  now  refer.    See  also  the  analysis  of  an 


3^« 


THE   VAI.UK   OF   Money 


him  into  the  error  of  su,.p<,slng  that  what  may  l>c  t.  «  of 
gold,  the  medium  of  cxchani-e,  and  rcscnc  for  credit  opera- 
ttms   IS   necessarily    true   of    the   standard   of   value   as 

Nicholson  is  correct.  '  nvcver.  in  looking  to  the  standard 
of  value  for  part  of  the  explanation  of  changes  in  prices 
And,  since  it  so  happens  that  a  considerable  part  of  the 
value  of  the  standard  of  value  comes  from  its  employment 
as  medium  of  exchange  and  reserve,  he  is  correct  in  look- 
ing to  Its  use  as  money  as  part  of  the  explanation  of  its 
value.  I,s  error  comes,  however,  in  failing  to  see  that 
mdepemlent  changes  in  the  values  of  goods  may  also  change 
the  price-level,  and  that  variations  in  the  deman..  for  gold 

change  the  price-level. 

Further  in  so  far  as  Nicholson  clings  to  the  notion  of 
prices  as  depending  on  a  mechanical  equilibration  of  physi- 
cal quantities,  he  is  subject  to  the  criticisms  given  be/ore  of 
the  general  quantity  theory,  and  in  so  far  as  he  clings  to  the 
Identity  of  the  value  of  gold  with  the  reciprocal  of  the  price- 
evel,--the  relative  conception  of  value-he  is  subject  to 
ttie  criticisms  already  urged. 

Again,  even  for  a  single  country,  the  connection  between 
volume  of  reserves  and  volume  of  credit  is  verv  loose  and 
shifting.    A  thousand  factors  besides  volume  of  standard 
money  in  a  country  determine  the  expansions  and  contrac- 
tions of  credit,  and  the  long  run  average  of  credit.     For  the 
who  e  world   this  connection  is  even  looser.    To  assume  a 
hxed  ratio  between  them  for  the  whole  world,  one  would 
have  to  assume  that  all  the  world  was  simultaneously,  and 
normally,  stra.nmg  its  possibility  of  credit  expansion  to  the 
utmost,  so  that  the  minimum  ratio-a  notion  which  is  far 

bSm!'  """""^  "  '"  '''  •''-"-"'"  "'  ---- '"  "-  -tion  on  Credit. 


Tire   QUANTITY   THEORY   AND   "WORLD   PRICES"      32Q 

from  prcciso  'should  also  bt-  the  normal  maximum,  and 
M)  that  no  country,  in  expanding  its  credit.  coul<l  draw  in 
new  reserves  from  other  countries  which  had  more  quiescent 
business  conditions. 

Nicholson's  notion  of  the  world  price-level,  moreover,  is 
subject  to  the  criticisms  I  have  made  in  the  chapter  on 
"The  Quantity  Theory  and  International  Gold  Move- 
ments." How  can  the  world  level  have  a  close  connection 
with  the  volume  of  gold,  if  different  elements  in  the  world 
price-level,  the  price-levels  of  different  countries,  can  vary 
so  widely  and  flivergently  as  compared  with  one  another? 
Even  granting— which  I  do  not  grant,  and  which  I  main- 
tain I  have  disproved— that  the  price-level  in  one  country 
has  a  close  connection  with  its  stock  of  gold,  would  it  not 
be  true  that  the  average  price-level  for  the  world  would 
vary  greatly,  with  the  same  world  stock  of  gold,  depending 
on  which  countries  had  the  gold? 

There  is  nothing  in  Nicholson's  doctrine  which  seems  to 
me  to  justi'y  in  any  degree  the  doctrine  that  prices,  in  a 
single  country,  or  in  the  world  at  large,  show  any  tendency 
to  proportional  variation  with  the  quantity  of  mone) ,  or 
with  the  worid's  stock  of  gold. 

Is  it  not  true,  then,  that  there  is  some  sort  of  relation 
between  gold  production  and  world  prices?  It  is.  Gold 
is  like  other  commodities.  Its  value  tends  to  sink  as  its 
quantity  is  increased.  As  its  value  sinks,  prices  tend  -o 
rise.  As  to  the  elasticity  in  the  value-cur\  tor  gold.  I 
think  it  will  be  best  to  reserve  discussion  tlV  a  later  chap- 
ter,2  in  Part  III.  We  shall  there  find  reaso-  for  thinking 
that  gold  has  much  greater  elasticity  in  this  respect  than 
most  othi  r  commodities.  That  its  value  should  !all  /w- 
portionatdy  with  an  increase  in  its  quantity.  I  shuuid  aisi 

'  Infra,  the  discussion  of  reserves  in  Part  II F. 
*Cf.  the  chapter  on  "The  (Jrigin  of  Money,"  iw/ri. 


I 


i:m 


U 


330 


THK   VALUi:    OF    MONEY 


at  all  conclude.  K\fn  if  its  value  (lit!  sink  proportionately 
with  an  increase,  prices  would  rise  proi)ortionately  only  if 
the  values  of  goods  remained  unchanged. 

But  why  <lo  vvc  need  a  quaulity  theory  theory  of  money, 
with  all  its  artitU  ial  assumptions,  and  its  law  of  strict  pro- 
portionality, to  enable  us  to  assert  the  simple  fact  that 
gold,  like  other  ccjmnioditics,  has  a  value  not  independent 
of  its  (juantity?  W  hat  theory  of  money  would  deny  it? 
Surely  not  the  commodity  or  buUionist  theory.  For  that 
theor}-,  which  seeks  the  explanation  of  the  value  of  money 
in  the  value  of  gold  in  the  arts,  it  would  go  without  saying 
that  an  increase  in  the  su{)ply  of  gold  for  the  arts  would 
lower  its  value  there  and  consequently,  its  value  as  money. 
Surely  the  theory  which  I  shall  maintain  in  Part  III  of 
this  book  will  not  deny  that  increased  gold  production  tends 
to  lower  the  value  of  money,  and  consequently  to  raise 
prices.  With  the  "quantity  theorist"  who  is  content  with 
this  conclusion.  I  have  no  quarrel— unless  he  claims  this 
obvious  truth  as  the  unique  possession  of  the  quantity 
theory! 


IJ 


CHAPTER  XK 

STATISTICAL  DEMONSTRATIONS  OF  THE 
QUANTITY  THEORY  THE  REDISCOVERY  OF  A 
BURIED  CITY 

In  the  f<.IIowing  chapter,  as  in  most  of  the  preceding 
chapters,  constructive  doctrine  is  aimed  at,  even  though 
the  discussion  takes,  in  considerable  part,   the  form  of 
critical  analysis  of  opposing  views.    We  shall  seek  t*.  set 
forth  the  facts,  as  far  as  may  be,  regarding  the  relations  of 
banking  transactions  to  trade,  the  relations  of  clearings  to 
amounts  deposited  in  banks,  the  relation  of  New  York 
City  clearings  to  country  clearings,  and  of  New  Yt  rk  bank 
transactions  to  bank  transactions  in  the  rest  of  the  country. 
We  shall  seek  to  ascertain  the  extent  of  variability  in  that 
highly  elusive  magnitude,  "velocity  of  circulation,"  par- 
ticularly "V."    We  shall  indicate  something  of  the  bear- 
ing of  index  numbers  of  prices  on  the  theory  of  the  value  of 
money  as  here  presented.    In  reaching  conclusions  on  these 
and  related  matters,  we  shall  build  on  the  investigations 
of  Dean  Kinley,  on  the  very  interesting  statistical  studies 
of  Kemmerer  and  Fisher  based  on  Kinley's  figures,  on  in- 
vestigations more  recently  made  by  the  American  Bankers' 
Association  regarding  the  relation  of  bank  transacdons  and 
bank  clearings,  on  figures  from  reports  by  the  Comptroller 
of  the  Currency,  as  well  as  on  other  sources.    One  purpose 
of  the  chapter  is  to  criticise  the  statistics  which  purport  to 
prove  the  quantity  theory.    The  bulk  of  the  chapter  is 
Riven  to  this.     But  the  work  of  Fisher  and  Kemmerer  thus 
criticised  yields  rich  rewards  for  the  study.    The  conclu- 
sions they  have  drawn  from  their  figures  are,  in  the  judg- 

331 


^•m^  c.rvftr'»r.«ra'  1. 


d 


M 


•■  * 


3S2 


T?:.'.  VALur;  of  money 


mcnt  of  the  writer,  untenable,  but  the  Hgv     ;  themselves 
are  of  immense  interest  and  importance. 

The  controversy  over  the  quantity   thi. ,       has  been 
waged  with  many  weapons.     Theor>-,   history    and  sta- 
tistics-u  say  nothing  of  invective! -have  been   freely 
employed.     In  large  measure,  the  statistical  studies  have 
been  concerned  with  the  direct  comparison  of  quantity  of 
money  and  prices,  in  their  variations  from  year  to  year. 
One  of  the  best  of  these  studies,  that  of  Professor  Wesley  C. 
Mitchell,  in  his  IJislory  of  the  Greenbacks  (followed  by  his 
Gold,  Prices  and  Waf^es  under  the  Greenback  Standard),  has, 
to  the  minds  of  many  students,  including  the  present 
writer,  put  it  beyond  the  pale  of  controversy  that  the 
fluctuations  in  the  gold  i)remium.  and  in  the  level  of  prices, 
in  the  United  States  during  the  Greenback  period,  both  for 
long  periods  and  for  daily  changes,  were  not  occasioned  by 
changes  in  the  quantity  of  money,'  but  rather,  primarily, 
by  military  and  political  events,  and  other  things  aflfecting 
the   credit    of    the    Federal    Goxernment,    together    with 
changes  affecting  the  values  of  gold  and  of  gtxKls.     Pro- 
fessor Mitchell's  discussion  is  so  detailed  and  thorough, 
that  what  controversy  remains  relates,  not  to  his  facts,  but 
rather  to  the  p<)ssi!)ility  of  inteqjreting  those  facts  in  har- 
mony with  the  quantity  theory,  by  repudiating  the  notion 
that  the  direct  comparison  of  gold  premiums  or  of  prices 
with  quantity  of  money  gives  a  valid  test.^ 

'Stu  cs|K;tiiiIly   History  of  tl,r  Greenbacks,  pp.    i88ff.;    ^07-208;    275- 

n-arious  efforts  have  Ik-iii  m.-..le  by  adherents  of  the  quantity  theory 
to  meet  he  fa.ts  ,levelo,H-.l  l.y  .Mi,. hell  with  ieferen.e  to  the  (Ireenfwcks. 
I  hus.  u  has  iK-en  sn^esl..!  thai  ih.- .  ..minK  to  par  of  the  (ireenlwcks  shortly 
lKf..re  the  resuniplion  of  .)„.  ie  paynuiils  was  an  a.vi.lenlal  roin.ideme 
-li..-  to  the  f...  1  that  Ih..  Nohnne  ..|  Ira.le  in  the  lnil.-.|  States  just  hapinne.! 
to  Krow  to  the  riKhl  inioiml  I..  I.rinu  the  tireenl.a.ks  to  par  at  that  lime 
\o  statislual  eM.Kn.v  ha>  Ihti.  oir.rr.l  for  this  thesis.  I  klieve  It  is 
in.lee<l.  the  only  h.^iial  thini;  uhi.h  a  ((uantilv  thi-orist  o.uld  siiv  on  the 
matter,  e.xopl  one  alternative.  (K.  K.  Clow.y.  P.  li.,  vol.  ,,.  p.  vj7)'namcly, 


TlIK   REDISCOVERY   OF   A    BURIED  CITY  j  ^  i 

Recent  defenders  of  the  quantity  theory  have  undertaken 
the  examination  of  more  complex  statistics  than  those  con- 
cerned with  the  simple  concomitance  of  quantity  of  money 
and  prices.    Two  of  these  studies,  the  first  by  Professor 

!llv  .'i  '*""  ^.';f'=."''*')'«  -should  exist  in  such  quantity  that,  under  the  quan- 
nty  th«,ry,  the.r  value  ousht  to  fall  lx-l,.w  the  discounted  future  value  .,f 
the  Kold  in  which  they  were  to  be  re<ieemifl.  sjx;culators  would  take  them 
nut  "f  "rcuiation.  holding  them  for  the  interest,  ami  so  reduce  their  quan- 
t>  that  the  va  uc  woul.l  rise  to  that  discounted  future  value.  The  first 
thesis  that  base.1  on  [uitative  changes  in  the  volume  of  trade.  thouRh  hishlv 
.m,m.bablc  m  fact  is  loRically  ,K,ssible.  The  second  thesis,  however  (P,  . 
rlM.s,ng  Pa^^.,r   f  .„  ,,    ^^,)  ^^^.j^  ^.^;^^^  dilliculties.     What  motive 

would  a  s,K.-cuIator  have  for  taking  the  (ireenbacks  out  of  circulation,  an-' 
hoaniinK  them?    Fhe  answer  is,  he  gets  thereby  the  "interest."  as  the  (Jreer- 
ba.ks  approach  the  <late  for  redemption  in  guld.    If  this  were  the  onlv  way 
in  which  he  could  get  this  gain,  the  answer  would  be  r.kkI.     But  there  is 
another  way  in  which  he  can  get  it.  and  something  more  k>sides,  namelv 
by  ln,d,„K  nut     s  C.rec-nbacks.    In  that  case-,  since  the  creditor  gets  the  fu'll' 
bene  It  of  an  appreciating  standard  of  deferre,!  jKiyments.  he  would  get  all 
.he     in  erest     which  he  could  get  by  hoarding,  and.  in  a.ldition.  he  woul.l 
get  contract  interest  on  his  lain.    Of  course,  if  the  principle  of  •'ai.precia- 
lion  ami  interest     worke.1  out  with  ,H.'rfect  smoothness,  he  would  find  his 
contract  interest  reduced  as  the  other  n.se.  and  one  might  even  exixrct    if 
the  (.reenbacks  were  very  redumlant,  that  contract  interest  would  dis- 
ap|H.-ar.     There  is  m)  evidence  that  thi.s  did  hap|)en,  however!    .\ml  so  long 
as  any  attract  interest  existed,  we  have  a  thoroughly  valid  reason  wh.  a 
holder  of  t.reenliacks  would  leml  them  n-.ther  than  mwrd  them 

Amither  elT.)rt  to  harmoni/e  the  fa.ts  with  the  theory  consists  in  the 
contention  that  „„ti,ip„lcd  future  increases  in  the  (ireenbacks  would  work 
m  the  same  way  as  actual  increases.  But  this  is  to  shift  the  whole  basis  of 
the  .(uantity  iheor.v.  which  rests  in  the  notion  of  a  mechanical  and-in  the 
niass-uncon<ious  ecpiilibration  of  quantity  of  monev  and  numf)cr  of  ex- 
changes. The  quantity  of  money  U  m.t  increase<l  until  it  is  incre-ased!  Cf 
•Mill.  J'r.napUs,  Bk.  HI.  .h.  u,  par.  .,  and  Jos.  K  Johnson,  Money  aJd 
i  iirrrnry,  Rev.  ed..  p.  ^35.  '    ^ 

I'rofessor  Fisher  has  am.ther  waj  to  meet  the  facts  of  the  CJrecnbaik 
regime,  and  that  is  by  hol.ling  that  they  prove  his  case!  I  do  m.t  think 
ttiat  anyone,  however,  who  examines  the  figures  he  offers  on  p.  2O0  (U  fit  > 
will  be  impa-s.sc-d  by  the  degree  of  concomitance  Ix-twetn  money  and  prices 
which  they  exhibit,  es|K.-cially  after  Mitciiell's  careful  f-nalysis  of  changes 
ui  detail.  " 

At  anotlMT  |«.inl.  !'r..fes.sor  Msher  maintains  (p.  -(,,)  that  the  rapid 
•hangesin  gold  premium  which  canu-  with  mws  fr-ni  the  militarv  ...M-ra- 
""'V-  «••  ":*■  ■»  V  '!^"'l'  in  <ir.vnbacks  after  ihickaniauga).  were  due 
to  alterations  in  velcKity  of  circulation  ami  in  volume  <.f  trade'  \s  'he 
gol<|  market  usiially  got  the  news  by  wire,  Ixfore  the  ncwspa,K.-rs  got'it, 
however,  this  thesis  i,  not  very  convincing. 


1 1 


M4 


THE   VALUE   OF  MONEY 


Kemmerer  *  and  the  second  by  Professor  Fisher,  are  so 
elaborate,  have  commanded  such  general  attention,  and 
have  been  accepted  by  so  many  students  as  conclusive 
demonstrations,  that  I  feel  it  proper  to  give  them  detailed 
examination.    I  do  this  especially  bee?  use  highly  important 
facts  for  our  construction  argument  emerge  from  this  crit- 
ical examination.     Kemmerer's  and  Fisher's  studies  reach 
high-water  mark  in  the  effort  tt)  give  statistical  demonstra- 
tions of  the  quantity  theory.     If  they  are  invalid,  then  I 
know  n^  other  attempts  which  many  students  would  sup- 
pose to  be  possible  substitutes.    The  theor)-  in\olved  in 
both  these  studies  is  clearly  stated  by  Professor  Kemmerer: 
"A  study  of  this  kind,  to  be  of  any  value,  must  cover  the 
monetary  demand  as  well  as  the  monetary  supply.     Any 
test  of  the  validity  of  the  quantity  theory  consisting  merely 
of  a  comparison  of  the  amount  of  money  in  circulation 
with  the  general  price-level  is  as  worthless  as  would  be  a 
test  of  the  power  of  a  locomotive  by  a  simple  reference  to 
its  speed  without  taking  into  account  the  load  it  was  carry- 
ing or  the  grade  it  was  moving  over."     This  criticism  of 
many  previous  studies  is,  in  general,  I  think,  valid,  though 
I  should  except  from  this  list  such  detailed  studies  as  that 
of  W.  C\  xMitchell.  who  takes  account,  as  far  as  may  be, 
of  all  the  \ariables  invoKed,  and  who  considers  day  by  day 
and  week  by  week  changes.     I  think  the  okler  studies  of 
Tooke,2  may  also  be  excepted.     In  iK)int  of  fact,  if  one 
wishes  to  know  how  much  reliance  may  be  placed  in  the 
quantity  theory  as  a  basis  for  prediction,  when  one  knows 
that  money  is  increasing,  the  simple  comparison  of  money 

'  Kemmt-rer.  i:.  \V     Money  and  Credit  hnlnmnnts  hi  lluir  Rrlatior,  to 
0.;,rr„l  Inas,  .V-w  V..rk,  i,;o7;  rishtr,  I'ur, having,  Pm.rr  ,.f  .Wonn;  New 
.       •  ,',".''=  ■'""*■'''"'"*  >■''■"■'>■  "'""""■"'•-ns  ..f  "The  Kquation  of  Kx 
( hange    in  the  .1  m.riow  l:,,>,wmu  Rrci.-^-.    Tin-  references  here,  as  throuKh- 
out.  are  to  the  lof  ^  eiiition  of  l'rofess<jr  Fisher's  Ixiok. 
^History  of  I'rins. 


THE   REDISCOVERY  OP  A   BURIED  CITY  335 

and  prices  is  a  fair  test.  If  the  "other  things  "  which  must 
be  equal  are  so  numerous  and  complex  that  the  quantity 
theory  cannot  manifest  itself  in  a  direct  comparison,  much 
of  Its  significance  as  a  basts  of  prediction  is  gone. 

It  is  perfectly  f  rue,  however,  that  studies  running  through 
long  periods,  which  give  simply  figures  for  general  prices 
and  figures  for  quantity  of  money,  omitting  volume  of 
trade,  are  not  very  relevant  either  for  proof  or  disproof  • 
And  the  conception  underlying  the  studies  of  Kemmerer 
and  Fisher,  that  not  merely  money  and  prices,  but  also 
volume  of  bank-credit,  volume  of  trade,  velocity  of  mone- 
tary circulation,  and  velocity  of  bank-credit,  must  be  meas- 
ured, undoubtedly  represents  a  big  advance  in  the  concep- 
tion of  the  statistical  problem  involved.     The  mere  stating 
of  the  problem  is  an  intellectual  achievement  of  no  mean 
order,  and  the  ingenuity  and  scholarship  involved  in  seek- 
ing data  for  concrete  measurement  of  these  highly  elusive 
elements  must  command  the  admiration  of  every  student 
of  monetary  problems.     \'olume  of  trade,  velocity  of  money 
and  velocity  of  bank-credit  had  been  generally  suppo.sed 
until  these  studies  were  undertaken,  to  be  beyond  the  reach 
of  the  statistician.     There  can  be  no  doubt  at  aU  that  the 
efforts  to  measure  them,  or  to  measure  variations  in  them 
by  Kemmerer  and  Fisher,  have  greatly  adxancetl  our  gen- 
eral knowledge  of  the  phenomena  of  money  and  credit. 

With  great  admiration  for  the  magnificence  of  the  prob- 
lem undertaken,  and  for  the  industry,  ingenuity  and 
scholarship  which  have  been  devoted  to  its  solution.  I  have 
nevertheless  reached  the  conclusion  that  the  figures  as- 
signed by  these  writers  to  the  magnitudes  of  their  "equa- 
Uons  of  exchange"  are,  with  the  exceptions  of  the  figures 
for  money  and  deposits,  widely  at  variance  from  the  real 

'To  this  ty,H.-  wouhl  iKlonK  Pr.>fc-s.s.,r  Fisher's  r.Kuri-s  with  reference  to 
the  years,  ,80a-66  <,n  j..  ..(,0  „f  his  Punham.g  Power  of  Mo^y. 


f 


3.?6 


THE   VAUTK   OF   MONEY 


facts  in  the  case,  and  second,  that  if  they  were  correct, 
they  could  in  no  sense  be  said  to  constitute  proof  of  the 
(juantity  theory. 

In  the  critical  analysis  which  follows,  chief  attention  will 
be  devoted  to  Fisher's  statistics.  His  is  the  later  study, 
and  it  follows,  in  main  outlines,  the  methods  laid  down 
by  Kemmerer.  He  has  emj)K)yed  Kemmerer's  statistics 
in  considerable  jxirt.  amplifying  them  for  later  years,  using 
-some  data  not  available  when  Kemmerer  wrote,  and  under- 
taking a  fuller  solution  of  certain  problems  than  Kemmerer 
did.  I  shall,  however,  from  time  to  time  make  reference 
to  Kemmerer's  figures,  and  show  points  of  diflerence  be- 
tween the  two  studies. 

Let  me  first  briefly  state  the  second  point  of  my  criticism 
of  these  studies:  namely,  that  even  if  the  statistics  are  cor- 
rect, they  do  not  constitute  proof  of  the  quantity  theory. 
The  statistics  puqiort  to  be  concrete  data  tilling  out  for 
different  years  the  equation  of  exchange.'     But  the  equa- 
tion of  exchange,  as  we  ha\e  .seen,  does  not  prove  the  quan- 
tity theory.     The  quantity  theory  is  a  causal  theory,  and 
causation  involves  an  order  in  time.     The  concrete  figures 
for  the  eciuation  do  not  prove  that.     Even  Kemmerer's 
concluding  chart  on  p.  148,  showing  a  rough  concomitance 
between  "relative  circulation"  and  general  prices  does  not 
show  that  changes  in  relative  circulation  are  causes  of 
changes  in  general  prices.     The  cau.sation  might  be  the 
reverse  lor  anything  his  figures  tell  us.     Fisher   himself 
recognizes  this,  in  con.siderable  degree:  "As  previously  re- 
marked, to  establish  the  equation  of  e.xchange  is  not  com- 
pletely to  establish  the  (luantity  theory  of  money,  for  the 
equation  does  not  reveal  which  factors  are  cau.ses  and  which 
are  efTects."  -    Again :  "  Ikit,  to  a  candid  mind,  the  quantity 
theory,  in  the  sense  in  which  we  have  taken  it,  ought  to 

'  This  riLitis  iwrtiiiilarly  t<.  Iishcr>  liKuris.  =  Loait.,  \,   n^. 


THK    RKI>IS( OVKKY   OF    A    lURIKD   CITY 


.^.^7 


appear  suflTiciently  secure  without  such  checking.     Its  Ijest 
proof  must  be  a  priori."^ 

The  main  criticism  here,  however,  relates  to  the  figures 
themselves,  rather  than  to  their  meaning.  The  figures 
given  by  Professor  Fisher  are  concrete  magnitudes  to  fill 
out  his  equation  of  exchange.  MV  +  M'V"  =  PT  -  for  the 
years  since  1896.  Thus,  for  1909,  the  figures  are:  M  =1.61 
I)illions;  M'  =  6.68  billions;  V  =  21. i;  V  =  528-  P  =  $i- 
T  =  387  billions. ' 

Now  in  what  follows,  I  shall  challenge  all  these  estimates 
except  P  for  1909.  V  for  1896  and  i()09,  and  M  and  M'  for 
all  years.  The  figures  for  M  and  M'.  iK-ing  the  results  of 
fairly  .simple  computations  based  on  (Jovernmental  sta- 
tistics, need  not  be  ciuestioned.  P  for  1909  is  arbitrarily 
l)laced  at  $1.00.  V  for  1896  and  1909,  for  reasons  which 
will  later  appear,  is  better  ba.sed  than  for  other  years, 
though  Kemmerer  and  Fisher  have  difTered  greatly  in 
their  estimates  for  V,  the  former  placing  it  at  47  and  the 
latter  at  18  or  20.'  My  criticisms  with  reference  to  V, 
however,  will  relate  to  the  years  other  than  1909  and  1896. 

The  sources  from  which  these  absolute  magnitudes  are 
drawn  are,  primarily,  two  investigations  by  Ooan  David 
Kinley,  one  in  1896  and  the  other  in  1909.  in  cooperation 
with  the  Comptroller  of  the  Currency.'  The  purpose  of 
these  investigations  was  to  asceruin  the  proportions  of 

'  //>/(/.,  p.  2c)y. 

Hf.  our  char>tcr,  supra,  on  the  "Kfiuation  of  K.vthanKe." 

'  These  are  the  "finally  adjusted"  fiRure-     l.oc  fit..  504. 

*fhid  i>  -J?;-  Fisher's  estim.ite  for  V,  as  corrcsjjonding  more  closely 
to  KmUy  s  liKures  for  the  pnnK.rtions  of  mone\  and  checks  in  trade,  is  to 
Ik-  preferred  to  Kcnimenr's.  (/.  our  comments  on  this  (x.int,  infra,  in  thi.s 
chapter.  lAin  the  fimircs  lor  M'  .ire  not  correct,  since  fhev  do  not  include 
<lc|K)sits  urowins  out  of  "morning  loans,"  aincelied  durin«  the  day.  Iiifr.i 
ch.  .'4. 

•  R,'l>„rl,>fUuComptrnlUr.  r.S(,(.;  Th>-  Vsc  of  Cndil  liislnimnih  In  hnmrnU 
III  the  Lnilid  Sl,ilrs,  National  .Monetary  fommis.sion  KeiK>rl,  WashinKton 

JVIO. 


338 


THE   VALUE   OF   MONEY 


checks  and  money  in  payments  in  the  United  States.  Banks 
of  all  kinds,  national  and  State  banks,  trust  companies, 
private  banks,  etc,  were  requested  by  the  Comptroller  to 
supply  data  for  a  given  day  (March  i6  in  1909)  showing 
what  their  customers  deposited  on  that  day.  They  were 
asked  to  classify  these  deposits  as  cash,  on  the  one  hand, 
and  as  checks,  drafts,  etc.  on  the  other.  They  were  also 
asked  to  give  a  cross  classification  of  the  same  deposits,  as 
"retail  deposits."  "wholesale  deposits,"  and  "all  other  de- 
posits." In  190Q.  over  12,000  banks  of  all  kinds,  out  of 
about  25,000  banks,  replied,  and  of  these  replies  11,492 
were  in  available  form.  These  replies  showed  a  total  of 
deposits  of  over  688  millions  of  dollars.  Of  this  total,  647 
millions  were  in  checks,  so  that  checks  made  up  94.1%  of 
the  whole.  About  60  millions  of  this  total  were  retail  de- 
posits, about  125  millions  were  wholesale  deposits,  and  the 
rest,  about  503  millions,  were  classed  in  the  "all  other" 
category.  Kinley's  use  of  these  figures,  for  his  purpose, 
.seems  to  me  in  every  way  conclusive  and  safe.  He  was 
interested  merely  in  the  (juestion  o\  the  proportions  of  checks 
and  money  in  payments,  retail,  wholesale,  and  "all  other." 
The  absolute  magnitudes  of  the  elements  in  the  equation 
of  exchange  he  was  not  trying  to  measure.  Professor 
Fisher's  use  of  the  figures  presents  a  different  problem.' 

Let  us  consider,  first.  Professor  Fisher's  estimate  of  M'V, 
taken  together  M'V"  is  considered  to  be  equal  to  the 
total  amount  (in  dollars)  of  checks  deposited  during  the 
year.-    To  get  this,  for  1909,  Kinley's  figure,  above,  for 

'  f  am  indebted  to  the  .  I  nmilisl  for  |)ermis.sion  to  use  here  materials  first 
published  in  the  Annalist  in  artiiies  hy  the  present  writer:  "Home  vs. 
loreit-nTrade."  Feb.  (>,  itji');  "  Ti>tsof  Home  Trade  Volume— a  Rejoinder," 
.Manh  6,  loK),  "Home  Trade  Volume,  '  Manh  20,  ujiO,  p.  377.  To  these 
arlitles  F'rofessor  I'isiur  re|)lied:  "A  Mulli-Hillion  iJoilar  Nation."  Annalist, 
I  ell.  ji.  iqid;  and  "Over  and  I'nder  Countinn,  '  Ihid.,  March  i,?,  1916. 

»  IvMept  chrtks  (k|x(sited  by  one  bank  in  another.  Kinley's  figures 
exclude  these  in  lyoy,  but  not  in  i8gO. 


THE  REDISCOVERY  OP  A   BURIED  CITY  339 

Checks  deposited  in  ir.49,  banks  on  March  16,  ,000   is 
used.    This  figure  is  647  milhons.    As  half  the  banks  had 
not  reported,  an  estimate  for  the  non-reporting  banks  was 
obtained  from  Professor  Weston,  who  had  aided  Dean 
Kinley  m  the  investigation,  and  who  hatl  access  to  the 
onginal    data.    Professor    Weston    estimated    the    total 
checks  deposited  during  the  day  at  1.02  billions  •    The 
qutK^tion  then  arose  as  to  whether  this  day  was  typical  for 
the  year.    Professor  Fisher  found  New  York  City  bank 
clearings  o    March   17   (the  day  after,  on  which  these 
checks  would  get  into  the  clearings)  to  be  28%  below  the 
average  or  the  year.    He  assumed  the  rest  of  the  country 
o  be  half  as  abnormal  as  New  York  City,  and  increa.sed 
he  1.02  billions  to  1.20  bilh-ons,  getting  what  he  conceived 
to  be  the  daily  average  of  checks  deposited  in  the  United 
States  m  1909.    Multiplying  this  figure  by  303,  the  number 
of  banking  days  m  New  York  City  (and  so,  presumably,  a 
fair  average  for  the  number  of  banking  days  in  the  countrv) 
he  obtained  364  billions  for  the  checks  deposited  in  1909.' 
This  figure  he  considered  to  be  M'V,  the  volume  of  bank 
deposits.'  multiplied  by  its  velocity  of  circulaUon     To 
obtam  V ,  therefore,  his  problem  was  simple:  he  divided 
the  figure  for  M'V  by  the  figure  for  M'  previously  obtained 
irom  government  statistics,  and  obtained  V 

Now  I  wish  to  call  attention  to  three  important  errors 
involved  m  this  calculation  of  M'V  for  1909.     (i)  The 
assumption  that  the  total  check  circulation  is  the  same  as 
the  volume  of  checks  actually  used  in  trade  is  a  violent  one 
Payments  may  be  tax  payments,  loans  and  repayments, 

I J.^?  T*^;^'  f"*^  '^^^  employed  by  Pmfessor  Fisher  are  devribed  at 
ImKth  m  his  P„rchas,„,  Paurr  of  Money,  ch.  XII.  and  Appendix  t^h  XII 

uS  his  tr '^     '•!^'  7i-'.-  ^''"'"•fh-t.  the  reader  mu,t  div 
on  March  fo  ''«=f""t^""f  K.aley',  tigure.^mounts  -deported" 


340 


THE   VM.rr  OF  MONEY 


I 


nifts,  what  not.  Many  checks  may  be  usc<l  in  a  single 
Iransac  li»n.  Surdy  not  ail  of  this  is  proiK-rly  to  he  (ounlcii 
in  ihf  M'\"  of  thi-  c(|uation  of  exchange.  But  this  topic 
is  iK'tter  iliscusseij  in  connection  with  the  estimate  for  T, 
and  I  reserve  its  fuller  (liscus.sion  till  then.  (2)  The  assump- 
tion that  the  rest  of  the  country  was  abnormal  in  its  clear- 
ings on  March  17.  1909,  is  a  pure  assumption,  which  in- 
vestigation »l(K's  not  verify.  The  rest  of  the  country  was, 
in  fact,  nearly  normal!  The  error  that  comes  for  the  year 
from  increasing  the  total  on  this  assumpti<m  amounts  to 
at  least  31  billions!  The  total  for  the  year,  on  Professor 
Fisher's  method  of  computation,  with  the  correction  to 
make  the  assumption  regarding  outside  clearings  corre.siK)n<l 
with  the  facts,  is  333  billions,  instead  of  364  billions!  As 
the  figure  for  1909  is  a  basic  figure,  on  which  figures  for 
other  years  are  calculated,  this  error  is  extremely  signifi- 
cant.' 

(3)  A  yet  more  .serious  error  in  this  computation  is  the 
a.ssumption  that  New  York  City  was  complete  in  Kinley's 

'  It  U  easier,  sotnetimes,  to  make  an  a.s.sum|>ti<in  rcKiirtiinK  a  set  <if  facts 
than  to  tind  out  what  thoy  are!  In  this  ruse,  some  work  was  involved.  Old 
news|>a|)ers  hiul  to  Ix;  hiinte<t  u[>  for  various  cities,  and  letters  had  to  lie 
written,  to  find  out,  for  various  cities,  (a)  clearinKs  for  March  17,  igoi),  and 
(l>)  the  numlx-r  of  banking  days  in  the  year  i(;oq.  This  work  was  done 
l)y  .Mr.  N.  J.  Silljerlinn,  who  Kot  li^ures  fn>m  12  cities  which  had  (x)',o 
of  all  cIcarinKs  outside  .New  York.  These  cities  are:  ChicaKo.  Philadelphia, 
Koston,  St.  lA>uis,  I'iti.  :iurK,  San  Francisco,  Baltimore,  New  Orleans, 
Atlanta,  Providence,  St.  I'aul,  ami  Seattle.  The  daily  averaKe  of  clearings 
for  these  cities  in  igoj  was  $136,.' >i,4_j();  the  actual  clearinKS  for  March  17, 
igog,  was  $i.{?,()()i,j73.  The  ratio  of  average  daily  clearinf^  to  actual 
clearinKS  on  .Vl.irch  17  was  1.0^45:1.  The  imrease  needed  in  the  figure  for 
de|M)sits  outside  \<-w  Nork,  then,  was  only  2.4s' <•  M""-  Silljerlinjt,  wish- 
injj  to  l)c  conservative  in  view  of  the  ,?i'o  "f  outside  clearinKs  not  in- 
veslij{ate<l,  allitws  outside  clearings  to  l>e  3','  Ik-Iow  normal.  On  this 
Iwsis,  following  Professor  Fisher's  meth(Ml  of  computation,  he  multiplies 
the  dejMtsits  assiKnttl  by  Professor  Fisher  to  .New  \'ork  by  i.iS,  and  the 
de|K)Mts  assinne<l  to  the  country  outside  by  i.o,<,  KettinK  total  deposits 
for  the  day  of  i.ii  billions,  as  against  Professor  Fi>her's  fiKure  of  1.20  bil- 
lions, and  a  total  lor  the  year  of  333  billions,  as  against  a  total  obtained  by 
Profe<Mir  Fisher  of  3(>4  billions. 


THE   REDISCOVERY  OF  A   BURIED  CITY  J41 

fiRurcs.  while  the  rest  of  the  country  was  incomplete.    This 
trrcr.  us  we  shall  see.  largely  neiitrali/..^  the  error  above  so 
ar  as  the  "finally  adjusted"  figure  for  u/x,  is  concerned, 
but  It  makes  a  vital  difference  in  the  figures  for  other  years 
as  will  appear,  since  it  affects  the  "weighting"  of  New 
York  clearings  and  outside  clearings  in  the  index  of  varia- 
tion by  means  of  which  M'V  for  years  other  than  1909  is 
determined.    The  assumption  that  New  York  is  complete, 
in  Kmley  s  figures,  and  that  all  of  the  extra  hundreds  of 
millions  added  by  Profes.sor  Weston  in  his  estimate  for  the 
non-reporting  banks  belongs  to  the  country  outside  New 
^  ork,  is  made  by  Professor  Fisher  both  on  pp.  444-445  in 
estimating  M'V'  for  ,909,  and  on  p.  446.  in  finding  an  index 
of  vanaUon  for  M'V'.     The  only  reason  given,  so  far  as  I 
can  find,  is  the  following:  "This  figure,  being/or  New  York 
[Italics  mine],  is  probably  nearly  complete."  (Loc.  cit.,  p. 
446.)     With  this  as  a  basis,  Professor  Fisher  proceeds  in 
his  calculaUons  to  treat  the  figure  for  New  York,  239  mil- 
lions, as  absolutely  complete,  and  gives  the  rest  of  Pro- 
fessor Weston's  1.02  billions  for  the  day,  or  786  millions, 
to  the  country  outside.    The  error  above  mentioned,  of 
assuming  the  rest  of  the  country  to  be  abnormally  low  on 
March  17  in  its  clearings,  still  further  increases  the  amount 
assigned  to  the  rest  of  the  country  in  the  total  figures  for 
the  year.'    The  conclusion  finally  is  that  New  York  had 
deposits  of  93  billions  in  checks  for  the  year,  while  the  rest 
of  the  country  had  deposits  of  271  billions  in  checks.    As 
New  York  clearings  for  the  year  were  104  billions,  while 
cleanngs  for  the  rest  of  the  country  were  only  62  bilUons 
Professor  Fisher  concludes  that  New  York  clearings  over- 
count New  York  check  deposits,   and  outside  clearings 

r«r^r^^. ""'?"'"  •''*7"'^''  *"'•"  '^«"'**  f"^  '^^  «h"l«'  year  are  Z 
iT^m^nT      '"''•  '"  '"^  ''"''  ^  '"""^  ^'"'  '"""er "exaggerated 


34J 


THE  VALUE  OF  MONEY 


greatly  undcrcount  outside  check  (leiK)sits,  so  that,  in  the 
index  of  variation  of  chetk  deposits,  for  years  other  than 
1009  and  i8<>0,  \ew  Vork  flearings  should  be  given  a 
weight  of  only  i,  while  outside  dearinKs  should  Ik;  weighted 
by  5.  "That  is.  on  the  basis  of  i(>og  figures,  five  times  the 
outsicie  clearings  plus  once  the  Xew  York  clearings  should 
be  a  good  barometer  of  check  transactions."  (P.  447.)  All 
this  rests  on  the  assumption  that  New  York  figures  for 
March  16.  iy<x>.  were  complete,  and  the  only  reason  as- 
signed is.  "lx.ing  from  New  York!" 

Now  the  figures  from  New  \'ork  were  not  complete. 
And  New  N  Ork  clearings  do  not  overcount  New  York 
check  dept)sits.  Outsitle  clearings  do  not  undercount  out- 
side check  deposits  nearly  to  the  extent  that  Professor 
Fisher  assumes.  For  each  of  these  three  statements  I  shall 
offer  what  wt>uld  seem  to  be  conclusive  evidence,  and  I 
shall  attempt  to  get  an  estimate  of  the  real  relation  be- 
tween New  York  check  transactions  and  check  transac- 
tions for  the  rest  of  the  country. 

First,  the  figures  for  New  York  were  far  from  complete. 
It  may  l»e  noted  that  Dean  Kinley,  in  his  volume  for  1909.' 

'  The  I'sf  of  CnJil  fif<triimnils,  t-ti..  p.  r^j.  There  i>  abundant  cvidenic 
in  Dean  Kinley's  fiKurf!<  that  only  a  (iciidedly  minor  part  of  the  amount 
(.17.^  millions)  of  chvikii  allowed  by  1'rofe.s.sor  Weston  for  the  non-reportinK 
banks  could  have  been  oiitsiile  the  larger  tilies.  The  amount  de|K>site<l 
in  a  day  in  a  rountry  bank  is  s<i  small  that  a  ({real  multitude  of  these  banks 
would  l)e  re<iuired  to  sln.w  as  much  as  a  sintdc  .New  York  City  institution. 
Thus,  ninety  banks  (.-;  national  banks.  s8  Slate  banks,  ^  private  banks, 
I  stiKk  savinRs  bank,  i  trust  company)  in  Arkansas,  report  only  $728,148 
in,.t:hecks.  an  averaRe  of  $«.cx)o  |>er  bank,  ff  all  the  13,000  non-refwrting 
Ijanks  were  country  tiank.*.  and  if  this  ratio  held,  we  should  have  105  mil- 
lions more  for  the  day  (instead  of  I»n>fcssor  Weston's  373  millions),  or  31 
billions  more  for  the  year.  Thiv  average  is  based  chiefly  on  State  and 
nali<mal  banks.  The  avera^'e  i»  1«k)  hish  for  the  private  l«nks  (whose  daily 
averaKc  as  rei>ortt-(|  is  $4,010).  and  for  the  mutual  savinRS  banks  (whose 
<laily  average  is  $i..\i4).  It  is  well  alxjve  the  daily  average  of  the  stmk 
savings  thanks,  whi«h  are,  in  many  States,  prartiially  commercial  banks 
($6,405).  In  the  non-rc|iorling  banks  there  arc  com|>aratively  few  national 
')ank^,  and  about  5,000  private  banks  and  suvings  banks,  of  these  the  great 


THK   REDISrOVEBY  OF  A   BIRIF.D  CITY  343 

is  very  careful  to  repudiate  the  .! -.sumption  that  the  cities 
were  complete  more  than  the  country:  "Moreover,  it  is  a 
mere  assumption  that  the  non -reporting  banks  are  mainly 
the  small  banks  in  the  country  districts.    A  ((real  manv  city 
banks  also  did  not  report:'    (Italics  mine.)    That  this  is  true 
for  New  Vork  is  abundantly  evident  from  figures  there 
given  for  the  private  banks  anrl  the  trust  companies,  not 
tf.  consider  at  all  the  State  and  national  banks.     New  York 
shows  only  Si. 751  in  checks  dqxjsited  in  the  "all  othtr 
fleposits"   in  private  banks!    This   is  a  city  which   in- 
cludes among  its  private  bankers  J.  P.  Morgan  &  Co., 
Kuhn,  Loeb  and   Co.,  J.   &   W.  Seh'gman  &   Co.,  and 
others!    Figures  from  these  banks  appear  nowhere  in  Kin- 
ley's  totals,  since  deposits  made  by  these  banks  in  other 
banks  arc  also  excluded  from  Kinley's  figures.'    Of  course, 
exact  figures  cannot  be  given  to  show  how  much  New  York 
would  be  increased  had  the  private  banks  made  full  reports. 
We  have  no  reports  of  any  kind  from  these  institutions. 
Every  feature  of  their  business  is  kept  from  the  lime  light, 
as  far  as  possible— a  practice  which  is  much  to  be  regretted, 
since  it  arouses  hostility  and  suspicion,  where  a  statement 
of  the  facts  in  the  case  would  frequently  entirely  di.sfwl 
them.    We  have,  however,  some  information   regarding 
the  magnitude  of  their  deposits,  meaning  by  deposits,  not 

majority  btinK  private  banks.  We  cannot  make  up  the  <;?  millions  in  the 
country  districts.  .\or  lan  we  make  up  the  .<7.}  millions  by  taking  in  all 
the  reser\e  ami  central  reserve  cities,  exclusive  of  New  \ork.  ChicaKo, 
in  the  returns,  sh<iws  4^.6  millions  in  chc-cks;  St.  Louis,  14  millions;  Boston! 
48.8  milli<ins;  Philadelphia,  j«.o  millions;  the  other  rcser\e  cities  show  40  2 
millions-a  total  of  1 74  millions.  If  we  (ioubk.l  the  returns  for  these  cities 
we  should  still  l)c  200  millions  short  of  the  <;,?  millions  addwl  by  J'nifcssor 
\yeston  to  the  total!  Neither  in  the  country  districts,  nor  in' the  major 
cities  outside  New  N  ork  can  we  (in<l  iiiouKh  to  make  up  that  addition.  \ery 
mm  h  of  the  amount  adde<l  for  non-rejiortinK  Iwnks  must  be  foumi  in  New 
Y«»rk  City  itself. 

'  Dean  Kinley's  questionnaire  askefl  the  Unks  reijorfing  their  deposits 
for  the  day  to  c.xclu<le  de|K.sits  made  !>>  other  banks.  These  deposits  were 
not  excluded  in  the  i8q6  investigation. 


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MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No    2| 


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S'JS  Rocheste'-.    New   York         14609       USA 

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li 


344 


THE   VALUE   OF  MONEY 


*l 


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i-i 


what  Kinley  means  in  ihh  investigation,  namely,  checks, 
etc.,  deposited  on  a  given  day,  but  rather,  deposits  in  the 
balance  sheet  sense  of  demand  obhgations  to  depositors. 
In  Nov.   191 2.  J.  P.  Mor-an  and  Co.  held  deposits  of 
Si  14,000.000,  exclusive  of . .    nillions  on  deposit  with  their 
Philadelphia  branch  of  Drexel  &  Co.    About  half  of  these 
were    deposits    of    interstate    corporations.     Kuhn-Loeb 
held,  on  the  average,  for  the  six  years  preceding  1913  over 
17  millions  of  deposits  of  interstate  corporations.    What 
their  aggregate  fleposits  were,  wc  do  not  know.     These 
figures  arc  obtained  from  the  report  of  the  Pujo  Committee. » 
Morgan's  deposits  were  equalled  by  only  three  banks  and 
two  trust  companies  in  New  York  (as  of  April  3.  191 5), 
and  Kuhn-Loeb's  deposits  for  interstate  corporations  alone 
exceeded  the  total  deposits  of  any  one  of  the  great  majority 
of  the  New  York  Clearing  House  banks  and  trust  companies'. 
Of  course,  large  deposits  in  the  balance  sheet  sense  need  not 
mean  large  deposits  made  on  a  given  day.     Private  bankers' 
deposits  may  be  inactive.     But  we  know,  first,  that  half  of 
these  figures  for  Morgan,  and  the  whole  of  the  figures  given 
for  Kuhn-Loeb,  represent  the  deposits  of  active  business 
coqjorations,  engaged  in  interstate  business.    They  are 
not  mere  trust  funds  lying  idle,  or  awaiting  investment  in 
securities.    What   the  rest  are  we  can  only  conjecture. 
That  they  are  deposits  of  men  and  firms  connected  with  the 
Stock  Exchange  in  some  way  is  highly  probable.     The 
whole  drift  of  the  statistics  presented  in  this  book,  and  of 
the  argument  developed  in  this  book,  would  serve  to  show 
that  such  deposits  are  likely  to  be  more  than  ordinarily 
active.2    I  refrain  from  assigning  any  figures  as  to  the 
amount  of  checks  deposited  in  private  banks  in  New  York 

^  House  Committee  on  '•  Money  Tru>l ,"     Feh.  jS,  loi^.    |'|,.  57,  ~s    ,4- 
-Cf.  supra,  and  nifn,  our  discussion  of  the  v.jlume  of  tnule.'  and  i'tfra 
our  discussion  of  credit,  particularly  the  analysis  of  bank-loans. 


THE  REDISCOVERY  OF   A   BURIED  CITY 


.U5 


on  March  i6,  1909.  It  must  have  run  high  into  the  mil- 
lions.' It  certainly  exceeded  the  two  thousands,  or  less, 
reported  to  Kinley!  The  figures  for  New  York  were,  thus, 
incomplete. 

But  the  trust  companies  were  also  incomplete.  The  na- 
tional banks  in  New  York  reported  checks  totaling  186.5 
millions,  for  all  three  classes  of  deposits;  the  State  banks 
reported  only  38.1  millions;  the  trust  companies  only  14.2 
millions.  With  aggregate  deposits,  as  shown  by  their 
balance  sheets,  exceeding  the  deposits  of  national  banks  - 
the  New  York  City  trust  companies  reported,  as  deposited 
on  March  16,  1909,  less  than  half  as  much  as  the  State 
banks,  less  than  a  tenth  as  much  as  the  national  banks,  and 
only  6.8%  of  the  two  combined— 5.9%  of  the  total  from 
all  three  classes  of  institutions! 

These  figures  are  hard  to  reconcile  with  the  assumption 
that  the  trust  companies  in  New  York  were  complete  on 
that  date. 

It  is,  of  course,  possible  that  the  trust  companies,  though 
having  large  deposits,  have  inactive  deposits.  This  is  some- 
times held  to  be  the  case.  But  that  the  difTerence  is  so 
great  in  activity  of  deposit  accounts  between  banks  and 
trust  companies  is  hardly  credible.  I  have  looked  into 
this  matter  with  considerable  care,  and  have  secured  infor- 
mation and  opinions  from  men  intimatel}  acquainted  with 
the  trust  companies  of  New  York  from  the  inside.  The 
only  available  quantitative  measure  of  the  activity  of  de- 
posits would  seem  to  be  the  volume  of  a  bank's  clearings. 
This  is  not  perfectly  accurate,  by  any  means,  but  it  is  the 
best  available  test.  Through  the  courtesy  of  a  Vice  Presi- 
dent of  one  of  the  largest  New  York  trust  companies,  I  have 

'  Vide  the  opinion  expressed  by  an  oft'ic iul  of  u  .New  \'oriv  trust  company, 
quoted  below,  on  p.  ^40. 
^Cf.  Horace  White,  Money  and  Banking,  sth  cd.,  |).  564. 


ri 


i 


.   i 


346 


THE  VALUE  OF  MONEY 


obtained  figures  from  an  official  of  the  Clearing  House, 
which  show  that  in  New  York  trust  company  clearings  run 
from  20  to  2$%  of  the  whole.  On  this  basis,  the  trust 
company  figures  for  1909  were  incomplete  to  the  extent  of 
from  33  millions  to  46  millions,  on  the  day  in  question. 
These,  clearings  figures,  however,  are  for  the  year,  1915,  and 
not  for  the  period  before  May,  191 1,  when  the  trust  com- 
panies were  admitted  to  the  Clearing  House.  Prior  to  that 
time  they  did  not  deal  directly  with  the  Clearing  House, 
but  through  the  member  banks.  Do  these  figures,  there- 
fore, represent  the  situation  as  it  existed  in  1909?  The 
possibility  was  entertained  that  entering  the  Clearing 
House  had  made  a  difference  in  the  reserve  policy  of  the 
trust  companies,  and  o  had  made  them  change  the  char- 
acter of  their  business,  in  such  a  way  as  to  bring  about 
greater  activity  of  accounts.  This  question  was  put  to 
the  official  of  the  trust  company  before  mentioned,  and  his 
reply  is  that  the  State  law  regarding  reserves  (passed  after 
the  Panic  of  1907)  had  already  brought  about  this  change 
in  reserve  policy,  and  so  no  difference  was  made  upon  enter- 
ing the  Clearing  House. 

The  same  gentleman,  by  the  way,  replying  to  a  question 
regarding  the  deposits  in  private  banks  in  New  York,  and 
the  influence  of  such  deposits  on  clearings,  writes:  "The 
actual  figures  could  not  be  obtained  from  the  Clearing 
House  .  .  .  ,  consequently  can  only  say  that  deposits 
made  with  these  houses  add  to  the  Clearing  House  totals 
very  large  sums." 

There  is  one  piece  of  evidence  which  would  seem  to 
negative  these  conclusions  regarding  the  trust  companies. 
In  the  Report  of  the  New  York  State  Superintendent  of 
Banks,  for  Dec.  31,  1907,  p.  xxxv.  is  a  statement  that 
during  the  two  years,  1903  05.  the  trust  companies  of 
New  York  cleared  only  7%  as  much  as  the  banks.    The 


THE  REDISCOVERY  OF  A   BURIED  CITY 


347 


Statement  relates,  however,  to  a  period  during  which  the 
trust  companies  not  only  had  no  Clearing  House  member- 
ship, which  of  course  was  true  up  to  191 1,  but  also  had 
largely  withdrawn  from  the  privilege  of  clearing  through 
member  banks.'  Under  these  circumstances,  even  7% 
would  seem  quite  high.  Inquiry  was  made  of  the  Honor- 
able Clark  Williams,  who  was  State  Superintendent  of 
Banks  at  the  time  the  report  was  made,  as  to  the  source 
of  the  figures. 2  Mr.  Williams,  in  reply,  defends  the  figures 
as  correct  for  that  period,  but  authorizes  the  writer  to 
quote  him  as  in  no  way  surprised  at  the  percentages  given 
above,  20  to  25%  of  the  total  clearings,  in  view  of  develop- 
ments and  changes  in  trust  company  business. 

I  conclude  that  the  trust  company  figures  for  March  16, 
1909,  were  exceedingly  incomplete.  The  national  bank 
figures  were  probably  more  nearly  complete  than  any 
others,  first  because  they  are  large,  and  second,  because 
national  banks  would  feel  more  obligation  than  other  banks 
to  reply  to  questions  from  the  Comptroller.  The  State 
bank  figures,  38.1  millions,  1  against  national  bank  figures 
of  186.5  niillions,  were  probably  incomplete  also,  to  a  con- 

'  Kirkbride  and  Sterret,  The  Modern  Trust  Co.,  Xew  York,  1905,  pp.  59-60; 
Cannon,  Clearing  Houses,  Xat.  Man.  Com.  Report,  p.  178;  Conant,  Prin- 
ciples of  Money  and  Banking,  II,  p.  244. 

'  Inquiry  was  also  made  of  Professor  George  E.  Barnett,  who  had  cited 
the  figures  given  by  the  New  York  Supt.  of  Banks  at  p.  133  of  his  Slate 
Banks  and  Trust  Companies.  Professor  Barnett  writes,  in  part,  as  follows: 
"I  made  no  independent  inquiry  at  the  time,  and  accepted  the  statement 
of  the  superintendent  of  banks  without  critical  examination  of  its  basis. 
From  what  you  say,  it  api)ears  highly  probable  that  he  was  mistiken  in  his 
conclusions.  The  only  question  in  which  I  was  interested  was  whether  the 
reserves  of  the  trust  companies  could  be  reasonably  lower  than  those  of  the 
national  banks.  I  did  not  care  .so  much  about  the  exact  ratio  of  clearings 
and  only  quoted  that  incidentally."  For  the  purposes  which  both  Professor 
Barnett  and  Mr.  Williams  had  in  view,  the  exact  ratio  was  unimportant. 
The  higher  figures  which  I  have  given  above  would  supiwrt  the  thesis  in 
which  both  were  interested,  namely,  that  trust  company  accounts  are  less 
active  than  bank  accounts,  and  so  lower  reserves  may  be  safely  held  by 
trust  companies  than  by  national  banks. 


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34S 


THE   VALUE   OF  MONEY 


siderable  extent,  though  State  banks  are  not  dominating 
factors  in  New  York  City.  That  they  should  exceed  the 
figures  for  trust  companies  is  surely  evidence  of  the  incom- 
pleteness of  the  trust  company  figures.  The  private  banks 
are  incomplete,  with  absolute  certainty,  since  they  are  vir- 
tually not  represented  at  all. 

Further  evidence  that  the  Xew  York  figures  were  in- 
complete, however,  will  appear  in  the  data  regarding  our 
second  thesis,  namely,  that  Xew  York  clearings  do  not 
overcount  Xew  ^'ork  check  deposits.  The  aggregate 
check  deposits  reported  from  Xew  York,  on  the  date  in 
question,  is  239  millions.  Clearings  for  that  day  were  268 
millions.'  substantially  exceeding  the  reported  check  de- 
posits. Xow  do  clearings  exceed  check  deposits  in  New 
York  Citv? 

Eviclence  with  reference  to  outside  clearings,  in  connec- 
tion with  bank  transactions,  we  now  have  in  very  definite 
and  abundant  form,  and  it  will  be  convenient  to  approach 
the  question  of  Xew  York  clearings,  first,  indirectly,  via 
country  clearings.  We  shall,  therefore,  take  up  first  the 
thesis  that  clearings  outside  Xew  York  do  not  undercount 
bank  deposits  outside  Xew  York  nearly  as  much  as  Pro- 
fessor^ Fisher  thinks.  According  to  his  estimate,  checks 
deposited  during  the  year  in  banks  outside  Xew  York 
(exclusive  of  checks  deposited  by  one  bank  in  another) 
were  271  billions.  (Loc.  ciL,  446.)  Outside  clearings  were 
only  62  billions,  and  his  conclusion  is  that  the  ratio  of  de- 
posits to  clearings  is  4.4  to  i,  or.  in  other  words,  that  out- 
side clearings  amount  to  less  than  22.8';;.  of  outside  check 
deposits. 

Xow  an  extensive  investigation,  covering  the  [leriod 
from  June.  1Q13.  to  Oct.  i()i4.  inclusive,  has  been  made  by 
tlic  American  Bankers'  Association,  through  Mr.  O.  How- 

'  I'ishcr,  luc.  tit.,  p.  444. 


THE   REDISCOVERY   OF   A    BURIED  CITY 


.vJ9 


arcl  Wolfe,  Secretary  of  the  Clearing  House  Section.  This 
investigation  covered  cities  of  various  sizes,  in  various 
parts  of  the  country.  Its  results  are  immensely  more 
trustworthy  than  any  results  based  on  a  single  day.  as  Pro- 
fessor Fisher's  results  are.  could  be,  even  had  Professor 
Fisher's  method  been  otherwise  correct.  An  account  of 
this  investigation  is  to  be  found  in  the  Annalist  of  Dec.  7, 
1914.1  This  investigation  involves,  for  the  period  in  ques- 
tion, a  comparison  of  "total  bank  transactions"  in  each 
city  with  the  clearing-^  of  that  city,  together  with  a  summary 
covering  all  the  cities.  "Total  bank  transactions"  consist 
of  all  debits  against  deposit  liabilities  of  each  member  of  the 
Clearing  House,  whether  they  come  through  the  Clearing 
House  or  over  the  counter.  They  include  payrolls,  for  ex- 
ample, which,  of  course,  never  get  into  clearings.  They  in- 
clude drafts  on  deposits  of  one  bank  in  another.  In  a  letter 
to  the  Editor  of  the  Annalist,  Mr.  Wolfe  states  that  "total 
bank  transactions  include  all  debits  against  deposit  liabil- 
ities, whether  by  check,  draft  or  charge  ticket.  The  only 
exceptions  are  certified  checks  and  certain  cashier's  checks, 
both  of  which  to  an  extent  represent  a  duplication."  For 
the  period  in  question,  clearings  amounted,  on  the  aver- 
age, for  all  ciries,  to  40%  of  "total  transactions."  The 
cities  did  not  include  New  York  City,  as  stated. 

Now  we  cannot  apply  this  40%  at  once  to  the  question  in 
hand.  Professor  Fisher's  22.8%  relates  to  the  relation  be- 
tween clearings  and  checks  and  drafts  deposited,  excluding 
items  deposited  by  banks,  and  excluding,  of  course,  cash 
deposited.  What  is  the  relation  between  Kinley's  "de- 
posits" and  Wolfe's  "total  transactions"? 

It  is  clear  that  "total  transactions"  must,  in  a  period  of 


'  f-  44,^-  Other  tii^cu^hil)Ils  of  this  investigation  .irc  in  the  Journal  <//  tin 
American  Bankers'  Association,  Jan.  1914,  p.  487;  Ibid.,  Feb.  1915,  p.  555; 
National  Banker,  March,  1915. 


i 


i  H' 


>>• 


i 


3SO 


THE   VALUE   OF  MONEY 


time,  exceed  Kinley's  "deposits"  very  considerably.  In  a 
general  way,  what  goes  out  of  a  bank,  and  what  comes  into 
a  bank,  must  approximately  equal  one  another  in  a  period 
of  time.  In  a  general  way,  a  depositor  finds  his  income  and 
his  outgo  balancing.  Of  course,  some  accumulate,  paying 
in  more  than  they  withdrew,  but  in  general  such  accounts 
are  made  with  savings  banks.  The  business  man  borrows 
from  his  bank,  getting  a  "deposit  credit"  (without  "de- 
positing" in  Kinley's  sense),  then  checks  against  his  "de- 
posit," then  receives  checks  in  payments  to  himself,  "de- 
posits" them,  building  up  his  deposit  balance  again,  and 
then  checks  against  his  deposit  balance,  in  favor  of  the 
bank,  to  pay  off  his  loan.  What  comes  in  and  what  goes 
out — abstracting  from  the  growth  of  a  rapidly  expanding 
bank — balance.  But  notice,  in  the  case  cited  above,  that 
"total  transactions"  include  more  items  than  Kinley's 
"deposits"  show.  When  the  bank  makes  a  loan,  and  gives 
a  deposit  credit,  this  does  not,  usually,  show  in  Kinley's  de- 
posits. When,  however,  the  loan  is  paid  off  by  a  check  to 
the  bank,  it  does  show  in  "total  transactions."  Moreover, 
when  a  man  deposits  cash  in  the  bank,  it  does  not  show  in 
Kinley's  figures  for  checks  deposited.  When,  however,  he 
withdraws  cash  from  the  bank,  or  his  check  to  another  is 
"cashed,"  it  does  appear  in  "total  transactions."  Further, 
checks  deposited  to  the  credit  of  one  bank  in  another  do  not 
appear  in  Kinley's  figures.  Checks  drawn,  however,  by  one 
bank  on  another  do  appear  in  total  transactions.  How  great 
the  difference  is  between  "total  transactions"  and  "de- 
posits" in  the  banks  outside  New  York  we  cannot  say  pre- 
cisely. The  cash  items  alone,  on  the  basis  of  Kinley's  figures, 
would  make  a  difference  of  about  9%.^    To  allow  11% 

'  None  of  the  cities  coverefl  in  the  figures  Ki\en  in  the  Annalist  were  in 
New  York  State.  Kinley's  figures  show  thul  tlic  pcrccntaKc  of  checks  re- 
ceived in  deposits  of  March  16,  1909,  in  banks  outside  New  York  State  was 
91%.    Loc.  lit.,  p.  180. 


THE   REDISCOVERY  OF  A   BJRIED  CITY 


351 


excess  to  "total  transactions"  over  "deposits"  for  the 
other  reasons  listed,  is  surely  not  to  make  an  exaggerated 
allowance.  Wc  thus  count  "deposits "  in  Kinley's  sense,  for 
the  banks  outside  New  York  City,  as  80%  of  "  total  transac- 
tions." Since,  then,  clearings  are  40',^,  of  "total  transac- 
tions," they  will  be  50%  of  "deposits."  This  figure  is 
more  than  twice  as  great  as  Professor  Fisher's  figure  of 
22.8%.  Even  if  we  counted  deposits  as  equalling  total 
transactions.  Professor  Fisher's  estimate  would  be  clearly 
very  much  too  low. 

How,  then,  do  we  stand?    On  Professor  Fisher's  showing, 
the  overwhelming  bulk  of  checks  deposited  were  in  the 
country  outside  New  York— 271  billions  for  the  year,  out- 
side, as  against  93  billions  in  New  York  City.    If  the  ratio 
(so*/;)  for  outside  clearings  to  deposits  was  the  same  for 
1909  that  it  was  in  1913-14  for  the  outside  banks,  we  shall 
have  to  revise  this  radically.    We  have  62  billions  of  coun- 
try clearings  in  1909;  we  would  have,  then,  124  billions  » of 
country  check  deposits!    If  Fisher's  total  figure  for  the 
country  is  correct,  353  billions  as  "finally  adjusted,"  the 
balance,  or  229  billions,  would  belong  to  New  York!    New 
York  clearings,  104  billions,  would  thus  be  less  than  half 
of  New  York  deposits!    If  we  count  outside  clearings  for 
1909  as  only  40%  of  outside  check  deposits,  outside  deposits 
would  be,  for  u:o9,  only  155  billions,  as  against  Professor 
Fisher's  27 1  billions,  a  difereme  of  116  billions!    I  am  sure 
that  his  error  in  estimating  outside  check  deposits  is  at 
least  as  great  as  that,  and  that  we  cannot  assign  to  New 
York  Cit}'  less  than  a  major  part  of  the  total  check  de- 
posits of  the  whole  country. 

'  Multiplying  the  408  millions  of  checks  deposited  outside  New  York  on 
March  16,  igog  by  303,  the  assumed  number  of  banking  days,  gives  12^  6 
billions.  Probably,  therefore,  124  billions  is  too  small  a  tjgure  But  we 
should  be  slow  in  modifying  a  figure  based  on  .7  months'  obser\'ations  be- 
cause of  the  figures  from  one  day's  observations. 


1 

! 

j 

\ 

li 

■  ■   ;  ; 

35^ 


THE   VAII'i:   OF   MONEY 


This  result  fits  in  with  the  lij,'ure.s  actually  rqxirtfd  to 
Doan  Kinlcy,  atrrirtcd  to  fit  the  known  fact>  al)oul  March 
17  clearings,  better  than  I'rofessor  Fisher's  estimate,  by  a 
good  margin.     According  to  Professor  Fisher's  estimate, 
New  York  City  checks  deposited  are  only  25.5' ,';  of  the 
total.     Kinley's  actual  figures  give  239  millions  to  New 
York  City,  and  408  millions  to  the  country  outsitle.     But 
New  York  clearings  were  i^Tl  below  normal  on  March  17, 
while  country  clearings  were  only  2.45' <';  below  normal. 
Adding  2%%  to  the  figure  for  New  York  checks,  we  get 
306  millions.    Adding  2.45*^' ('  to  the  outside  checks,  we  get 
418  millions.    Of  the  total,  724  millions.  New  York  checks 
would  be,  then,  42.  f  I.    We  have  shown  reasons  for  con- 
sidering New  York  deposits  to  be  very  incomplete  for 
March  16,  i)articularly  as  regards  the  private  banks  and 
trust  companies.    Comparison  of  the  New  York  figures 
with  the  results  indicated  by  the  ratio  of  country  clearings 
to  country  deposits  would  thus  indicate  that  New  York  was 
much  less  complete  than  the  country  as  a  whole.     Even 
so,  I  need  to  add  but  7.3^{  of  the  total  to  Kinley's  actual 
figures  for  New  York,  corrected  in  the  light  of  next  day 
clearings,  to  give  New  York  half  of  the  check  deposits. 
Professor  Fisher  must  subtract  16.8%  of  the  total  from  the 
actual  figures  for  New  York,  as  corrected  in  the  light  of 
next  day's  clearings,  in  order  to  get  his  figure  of  25.5%. 
To  vary  as  widely  from  the  actually  reported  figures  as 
Professor  Fisher  docs,  I  should  have  to  assign  59.1%  of 
total  check  deposits  to  New  York  City.    I  refrain  from 
making  an  exact  estimate.    I  am  content  with  the  con- 
clusion that  something  more  than  half  of  the  checks  de- 
posited in  1909  were  in  New  York.    This  seems  to  be  too 
clear  for  serious  controversy. 

The  indirect  approach  to  the  relation  between  New  York 
clearings  and  New  York  deposits,  via  the  study  of  outside 


THE   REDISCOVERY  OF   A   nURIKI)  (  I TY  .^q.) 

clearings  in  1913  and  1914,  taken  in  conjunction  with  tin- 
figures  for  check  (ici)osits  in  1909,  would  seem  to  m;iki- 
it  quite  clear  that  New  York  clearings  do  not  exceid 
New  York  deposits,  or,  indeed,  constitute  a  substantialK- 
higher  percentage  of  them  than  is  the  case  with  country 
clearings  and  deposits.'    Logically,  assuming  the  correct- 
ness of  the  estimate  for  checks  deposited,  the  case  is  com- 
plete: we  have  a  simple  problem  in  arithmetic:  given  coun- 
try clearings  for  1909,  62  billions;  given  the  ratio  of  country 
clearings  to  country  deposits  (and  a  minimum   for  this 
ratio  is  cleariy  given,  in  the  4of;i  which  country  clearings 
are  of  "total  transactions"),  we  can  fix  a  maximum  for 
country  deposits,  which  is  155  billions.    Then,  given  our 
estimate  of  353  billions  for  total  check  deposits,  we  subtract 
the  maximum  possible  for  country  deposits  from  it.  and 
get  a  minimum  possible  fo.  New  York  City  of  198  billions 
of  check  deposits.    Comparing  this  with  the  known  clear- 
ings of  104  billions  in  New  York,  we  find  that  New  York 
clearings  constitute,  as  a  maximum  possible,  52.5%  of  New 
York  check  deposits.   If  the  reasons  given  for  holding  check 
deposits  in  the  country  to  be  less  than  total  transactions  are 
accepted,  the  ratio  of  clearings  to  deposits  in  New  York 
City  is  lower. 

Indirect  calculations,  however,  even  when  logically 
complete,  ought  to  be  checked  up  by  other  methods,  when 
possible.  We  have  some  further  data,  drawn  from  an 
earlier  period,  1890-91-92,  which  suggest  the  same  con- 
clusion. 

The  reason  commonly  offered  for  holding  that  New  York 

'  I  have  greater  confidence  in  this  comlusion,  since  seeinK  a  letter  from 
Mr.  Howard  Wolfe,  who  made  the  investlKution  of  outside  clearinKs  and 
total  transactions"  for  the  American  [Jankers'  Asso.iati-n  to  Mr  O-^m-md 
Phillips,  Editor  of  the  Anmilhl.  Mr.  Wolfe  writes:  "  I  do  not  believe  that 
the  experience  of  the  New  York  banks  would  differ  from  that  of  other  insti- 
tutions which  now  supply  [these  figures). " 


n 


354 


THE   VALUE   OF   MOXF.Y 


charings  exaggerate  local  Xevv  York  transactions,  as  com- 
pared with  country  clearings  ami  country  transactions, 
is  that  New  V'ork  is  the  clearing  house  for  the  country. 
Country  banks  send  their  idle  cash  there;  country  l>anks 
pay  other  hanks  by  drafts  on  their  New  York  balances; 
country  banks  send  out  of  town  checks  to  New  York  for 
collection;  business  men  in  St.  Louis  pay  business  men  in 
Chicago  with  New  York  exchange,  etc.  These  items  arc 
supposed  greatly  to  swell  New  York  clearings. 

Now  several  of  these  reasons  are  not  at  all  valid.  Cash 
shipped  back  and  forth  between  New  York  and  the  in- 
terior does  not  get  into  cL-arings.  Secondly,  New  York, 
because  of  the  charges  made  for  collecting  out  of  town 
checks,  has  tended  to  lose  much  of  the  collection  business. 
Chicago  probably  does  a  great  deal  more  of  it  than  New 
York  does.'  However,  even  if  checks  on  out  of  town 
banks  were  sent  largely  to  New  York  for  collection,  they 
would  not  get  into  the  clearings.  New  York  banks  send 
checks  on  country  banks  directly  to  country  correspond- 
ents. Checks  on  out  of  town  banks  sent  in  for  collection 
do  swell  clearings  in  Boston  and  Kansas  City,  where  ar- 
rangements have  been  made,  to  the  advantage  of  all  con- 
cerned, to  have  the  clearing  houses  handle  this  business. 
But  New  York  has  not  made  provision  for  it.^  The  only 
checks  that  get  into  New  York  clearings  will  be  checks 
drawn  on  New  York  banks.'' 

'  My  information  on  this  point  comes  from  Professor  O.  M.  W.  Spr.iRUe. 
It  is  corroborated  by  an  oflicial  of  the  Hanicers  Trust  Coni[)any  in  \cw  York. 

-  Vidr  Rodney  Dean,  of  the  Fifth  Avenue  Hank,  Xew  York,  "The  I'rol)- 
lem  of  CoUcclint;  Transit  Items,"  Journal  of  the  American  Hankers'  Associa- 
tiitn.  Jan.  1014,  I).  .S.U-  Hoston  inaugurated  the  system  in  i8f)o-igoo; 
Kansas  City  live  years  later.  Since  the  above  was  written,  I  have  learned 
that  Xew  York,  in  recent  months,  has  intrwluced  the  new  system.  This 
does  not  affect  our  arj^ument  regarding  the  figures  for  igoq. 

■^  Since  the  foregoing  was  written,  my  attention  lias  Ijcen  called  by  Mr. 
Osmund  Phillips,  Financial  I'.ditor  of  the  Xew  York  Times,  and  Kditor  of 
the  Annalist,  tu  indirect  ways  in  which  items  on  out  of  town  banks  sent  to 


THE  REDISCOVERY  OF   A   MURIED  CITY  ^55 

These  checks  will  be  of  two  kinds:  (i)  ,       L  ,  drawn  by 
incJividuuls  and  firms  on  New  York  banks,     i  hcse  checks 
will  commonly  be  drawn  by  people  in  New  York,  and.  in 
so  far  as  they  come  from  out  of  town,  will  represent  busi- 
ness  between  New  York  and  other  places,  hence,  New 
York  business.    (2)  Drafts  by  banks  on  their  New  York 
balances.    These  will  be  of  three  kinds:  (a)  drafts  sold, 
esijecially  by  country  banks,  to  their  customers  who  need 
to  make  payments  in  other  cities.    Many  of  these  will 
represent  payments  to  New  Yorkers  for  transactions  be- 
tween New  York  and  the  country,  hence  New  York  busi- 
ness, and  will  appear  in  the  check  deposits  of  individuals 
firms,  and  corporations  in  New  York,     (b)  There  will  alsJ 
be  drafts  from  one  country  bank,  on  New  York,  to  another 

New  York  f..r  collection  will  affect  New  York  clearinRs.     Country  corre- 

mTv  r^mi.  r^tV"  "'^f  '''^'  '■""'  '''"''^  ^"'^  '*"=«  J*^'"'  ^«'  «>"«"^. 
ma>  remu  for  them  in  four  w-ys:    (,;  by  sending  cash;  (j)  by  sending  items 

on  out-of-town  banks  which  the  New  York  bank  will  ^„d  on  totme  othe 

correspondent  for  collection;  (j)  by  draft  on  the  New  York  bank  which 

has  sent  the  items  to  be  collected;  (4)  by  draft  on  some  other  New  York 

bank.    In  the  last  case,  New  York  clearinBs  are  affected.    The  f-  st  case  is 

no  ,  quantitauvely,  important.    The  second  and  third  cases  would  seem 

to  be  the  normal  tyjjes,  assuming  correspondent  relations  between  New  York 

banks  and  country  banks  to  be  reciprocal,  since  the  New  York  bank  would 

be  disposed,  as  far  as  jwssible,  to  turn  over  its  collection  business  to  iu  own 

depositor,  among  the  country  banks.    Mr.  Phillips  says,  however,  that  the 

^■fl  T^  'collection  Items  do  not  affect  New  York  clearings  must  be 
modified,  and  it  becomes  a  mat'.er  of  imix>rtance  whether  these  items  arc 
^rge  or  sma  1.  My  information,  as  stated  above,  is  that  Chicago  exceeds 
New  \ork  City  in  this.  *      ^«-«;u3 

If,  however,  the  Kansas  City  and  Boston  arrangements  held  in  New  York 
these  collection  Items  would  be  represented  fuke  in  New  York  clearings! 
The  fact  that  the  items  do  not  themselves  get  into  the  clearings  remains 
_  IJirect  information  regarding  New  York  clearings  is  very  desirable  Our 
indirect  ar:)roach  must  be  considered  inconclusive  until  more  detailed  fig- 
ures for  New  York  City  are  at  hand.  We  need  figures  covering  all  types 
of  banks  in  New  York,  for  a  period  of,  say,  a  year  (to  allow  for  seainal 
changes),  in  which  deposits  made  by  one  bank  in  another  are  separated 
from  other  deposits.  National  banks  alone  would  exaggerate  the  item  of 
deposits  by  one  bank  in  another,  especially  as  they  are  the  depositories  of 
tiie  great  private  banks. 


'  tnii 


i 


!  ! 


v,^y 


i     \\ 


35( 


THE   VALUK   OF  MONEY 


( ountry  ban'"  '"n  which  New  York  is  truly  being  used  as  a 
( k-ari*-  ;  h()U^,. ,  Xtw  York  exchange  taking  the  pUice  of  an 
intiTcity  shipment  of  cash. '  (c)  Drafts  by  New  York  banks 
on  New  York  l)anks.  to  avoid  deficits  at  the  Clearing 
House,  or— especially  in  the  case  of  private  bankers,  be- 
tween whom  and  brokers  the  line  is  hard  to  draw,— for 
general  purposes. 

Now,  fortunately,  we  have  some  data,  trustworthy,  even 
though  old,  for  the  volume  of  bank-drafts  on  New  York, 
and,  more  important,  for  the  proportion  of  drafts  on  New 
York  to  drafts  on  banks  in  other  cities.    These  figures  are, 
as  stated,  from  the  three  years,  1890,  1891,  and  1892.    For 
the  purpose  in  hand,  however,  they  are  relevant,  since 
then,  as  now.  New  York  clearings  were  nearly  twice  as 
great,  on  the  whole,  as  country  clearings,  and  if  this  excess 
of  New  York  clearings  is  due  to  that  cause,  it  should  have 
manifested  itself  in  th.:.^  figures.     If  the  proportion  of 
these  drafts  on  New  York  to  the  total  of  bank-drafts  was 
greater  than  the  proportion  of  New  York  clearings  of  total 
clearings,  we  might  find  reason  for  supposing  that  New 
York  clearings  were  unduly  swelled  by  this  Tact.    But  in 
fact,  drafts  on  New  York  are  not  out  of  proportion.    The 
figures  are  virtually  complete  for  drafts  drawn  by  all  the 
national  banks  on  national  and  other  banks  for  the  years 
in   question.     They  will  be  found  in  the  Comptroller's 
Reports  for  the  three  years,  under  the  caption,  "Domestic 
Exchanges."     For  1890  the  figures  are: 

'  Or,  in  some  cases,  taking  the  place  of  cash  deaUngs  between  banks  and  a 
local  clearing  house.  On  the  face  of  it,  it  is  incredible  that  balances  between 
cities,  or  ivitliin  cities,  after  the  country  clearing  houses  have  done  their 
work,  should  be  so  great  us  to  account  for  a  very  great  part  of  New  York 
clearings.  These  balances  between  cities  other  than  New  York,  and  bal- 
ances within  country  clearing  houses,  must  be  a  minor  fraction  of  counlry 
clearings,  and  country  clearings  arc  little  more  than  half  of  New  York 
clearings.  Ordinary  conunerie,  as  ^ik)wn  in  chi'iitir  Xfll,  cannut  give  rise 
to  great  sinus  in  the  aggregate,  to  say  nothing  of  giving  rise  to  great  bshuues. 


THE   REDISCOVERY  OF  A   BURIED  CITY  357 

Drafts  on (ooo.cxx)  omitted) 

New  York §  7,  .84  (6,5.07';; ) 

<^'hicago ,,084  (  o.jo';; ) 

St.  Louis 188  (  1.64';; ) 

Other  reserve  cities 2,537  (2iM^/, ) 

Other  cities 464  (  4.029; ) 

Total 11,550  (    1009;) 

The  Comptroller  (Report  of  1890,  p.  19)  gives  an  estimate 
for  drafts  drawn  by  State  and  private  banks  of  an  additional 
6,089  niillions.  He  does  not  try  to  apportion  these  among 
New  York  and  the  other  cities.  There  is  no  reason  to  sup- 
pose that  the  percentage  for  these  banks  of  drafts  drawn 
on  New  York  would  be  higher  than  for  national  banks,  and 
there  is  some  reason  for  supposing  that  they  would  be 
lower:  namely,  that  these  institutions  would  lack  the  in- 
centive supplied  by  the  National  Bank  Act  for  depositing 
reserves  in  a  Central  Reserve  City.  The  Comptroller's 
figures  probably  do  not  include  the  great  private  banks  in 
New  York,  which  deposit  in  New  York  commercial  banks, 
and  draw  huge  checks  against  their  deposits.  These 
checks,  probably,  however,  chiefly  represent  stock  exchange 
collateral  loans  to  brokers,  and  so  appear  in  brokers'  de- 
posits as  well  as  in  New  York  clearings— represent  New 
York  deposits.  I  do  not  use  this  estimate  in  my  computa- 
tions. If  I  did,  the  results,  so  far  as  proportions  are  con- 
cerned, would  be  the  same,  since  I  could  do  nothing  but 
assign  the  same  proportions  to  them.  It  will  be  seen  that 
my  argument  rests  on  the  proportions,  chiefly. 

Now  what  ditTerence  would  be  made  if  we  wiped  out  all 
these  draft  transactions,  and  reduced  clearings  to  corre- 
spond? New  York  clearings  in  1890  were  37,660  millions; 
country  clearings  were  21,184  millions.  Let  us  subtract 
the  drafts  on  New  York  from  New  York  clearings,  and  the 
drafts  on  other  places  from  the  country  clearings.    The  re- 


358 


THE   VALUE  OF  MONEY 


!  I 


:  I 


!5 


suit  is:  New  York  clearings,  30,376  millions;  country  clear- 
ings, 16,918  millions.  New  York  clearings  still  retain 
their  former  status!  New  York  clearings  arc  still  nearly 
twice  as  great  as  country  clearings!  It  is  not  the  bank 
drafts  used  in  making  New  York  the  "clearing  house"  for 
the  country  that  swell  New  York  clearings  as  compared 
with  the  rest  of  the  country!  It  is  something  else!  The 
main  explanation,  as  we  have  in  part  seen,  and  shall  further 
see,  is  a  mass  of  speculative  transactions,  chiefly  Stock  Ex- 
change transactions,  and  loan  transactions  connected 
therewith!  New  York  clearings  grow  out  of  New  York 
business,  primarily. 

The  figures  for  the  other  two  years  vary  little  from  those 
of  1890.  What  variation  there  is  shows  a  growth  of  drafts 
on  interior  cities,  and  a  decline  of  drafts  on  New  York. 
New  York  showed  63.07%  of  these  drafts  in  1890,  61%  in 
1891,  and  60.77%  in  1892.* 

As  we  have  seen,  the  only  checks  or  drafts  that  get  into 
New  York  clearings  are  those  drawn  on  New  York  banks. 
The  checks  on  New  York  banks  probably  abnost  all  repre- 
sent business  in  which  one  party  is  a  New  York  individual, 
firm,  or  corporation.  The  drafts  by  out-of-town  banks 
will  contain  all  the  items,  virtually,  that  represent  "clear- 
ings "  through  New  York.  Not  all  of  these,  by  any  means, 
will  represent  such  clearings.  A  very  substantial  part  of 
them  will  represent  exchange  sold  to  customers  to  make 
payments  in  New  York.  We  exaggerate  the  "clearing 
through  New  York"  when  we  subtract  all  these  drafts 
from  New  York  clearings.  Since,  however,  we  treat 
country  clearings  in  the  same  way,  no  error  results,  so  far 
as  the  proportions  between  them  are  concerned. 
The  two  sets  of  data  converge.    Both  from  the  figures 

'  The  whole  thing  is  summed  up  or.  j..  25  of  the  Comptiol'er's  Rvbort  for 
1892. 


THE   REDISCOVERY  OF  A   BURIED   CITY 


350 


of  1913-14,  in  conjunction  with  estimated  check  circula- 
tion in  1909,  and  from  the  figures  of  1890-92,  can  we  con- 
clude that  New  York  clearings  do  not  overcount  New  York 
transactions.  The  conclusion  would  seem  to  be  inevitable 
that  New  York  is  really  as  important  in  our  volume 
of  banking  transactions  as  its  clearings  would  indicate. 
This  may  be  qualified  by  a  recognition  of  the  possibility 
that  New  York  clearings  are  more  efficient  in  handling 
check  deposits  than  are  clearings  in  other  cities.  Some 
scattering  data  from  national  banks  for  single  days  at  a 
time  indicate  that  a  higher  percentage  of  checks  is  cleared 
in  New  York  than  elsewhere  in  the  country,'  and  one  ob- 
servation for  five  national  banks  for  a  ten-day  period  shows 
67%  of  checks  deposited  cleared.-  These  checks  include  de- 
posits made  by  other  banks,  as  do  the  figures  of  Kemmerer's 
observations.  But  there  are  no  direct  observations  cover- 
ing New  York  for  a  long  enough  period,  or  for  enough  insti- 
tutions, to  warrant  any  definite  conclusions.^ 

'  Cf.  Kemmcrer,  Money  and  Credit  Instruments,  p.  117. 

'^Annalist,  July  6,  19 14,  p.  8.  The  editor  of  the  Annalist  gives  me  the 
following  information :  data  for  twenty  banks,  six  in  New  York  and  fourteen 
in  Chicago,  Philadelphia,  Boston,  and  St.  Louis,  for  the  week,  Aug.  28- 
Sept.  2,  1916,  show  that  clearings  are  71%  of  "total  transactions"  in  New 
York,  and  about  40%  in  the  other  cities.  These  figures  are  all  for  national 
banks,  except  for  one  bank  in  St.  Louis. 

'  There  is  one  further  generalization  developed  in  connection  with  Mr. 
Wolfe's  investigation  of  the  ratio  of  clearings  to  "total  transactions"  which 
seems  to  have  relevance  here,  though  I  am  not  sure  how  it  should  be  in- 
ter|>reted.  The  average  ratio,  as  stated,  is  about  40%.  This  varies, 
however,  for  different  cities.  "The  rule  seems  to  be  that  the  larger  the 
proportion  of  bank  deposits  to  individual  dci)osits,  the  smaller  will  be  the 
figure  representing  this  ratio.  In  Cincinnati,  for  example,  it  is  31.4% 
while  in  Los  /Vngeles  it  is  59.7%."  (Jour,  of  American  Bankers'  Ass'n, 
Jan.  1914,  p.  487.)  How  safely  based  this  generali^sation  is  cannot  be 
told  from  the  context,  as  no  further  facts  are  offered.  Nor  is  its  bearing 
on  the  question  at  issue,  as  to  whether  or  not  New  York  clearings  bear  a 
higher  ratio  to  New  York  deposits  than  country  clearings  do  to  country 
deposits,  entirely  clear.  It  would  seem  to  indicate  that  deposits  made  by 
outside  bankers  in  the  banks  of  rcser\e  cities  make  smaller  contributions 
to  clearings  than  individual  deix)sils  do,  and  this  would  fit  in  with  the  fact 


!  ! 


!  i 


* 


U 


li  I 


iOo 


THE   VALUE   OF   MONEY 


The  error  of  assuming  clearings  of  March   17  in  the 
country  outside  New  York  to  be  abnormally  low,  swelled 
Professor  Fisher's  total  figure  for  check  circulation  by  31 
billions,  as  we  have  seen.    On  the  other  hand,  the  error 
of  assuming  New  York  City  to  be  complete  in  Kinley's 
figures  tended  to  make  the  total  smaller  than  it  would  have 
been,  since  New  York  City  was  28^;(  below  normal,  and  an 
increase  of  28^1  applied  to  half  of  Professor  Weston's 
figure  of  1.02  billions,  gives  about  70  millions  m->re  for  the 
day,  or  21  billions  more  for  the  year,  than  when  'he  28% 
increase  is  applied  to  only  a  quarter  of  Professor  Weston's 
figure.     These  two  errors  roughly  neutralize  one  another, 
and  we  may  accept  Professor  Fisher's  "finally  adjusted'' 
estimate  of  353  billions  '  for  the  year  as  roughly  approx- 
imating the  amount  of  checks  deposited.-    How  "rough" 
an  estimate  one  gets  by  taking  a  single  day  as  the  basis 
for  a  year  need  not  be  here  discussed.     I  should  be  disposed 
to  think  that  an  indirect  calculation,  via  clearings,  in  view 
of  our  more  extensive  knowledge  of  the  relation  of  clearings 
to  "total  transactions,"  might  well  be  worth  more,  so  far 
as  deposits  outside  New  York  are  concerned.    Since,  how- 
ever, we  lack  any  extended  figures  for  the  relation  of  trans- 
actions and  clearings  in  New  York,  and  since  even  for  the 
country  we  are  obliged  to  make  guesses  as  to  the  relation 
of  "checks  deposited"  to  "total  transactions,"  I  refrain 
from    trying   to   improve   further   on    Professor   Fisher's 
estimate    for    checks    deposited    in    1909— even    though 

th;il  checks  on  oiitsulc  banks,  dciK)sited  for  collection  by  one  bank  in  another 
(i<)  not  Ket  into  clearinss.  What  further  explanation  or  significance  it  has 
1  cave  to  the  reader.  It  is  |K)ssible  that  there  are  a  number  of  important 
relevant  facts  missing  reKardinj,'  New  York  dearinRS,  and  that  the  con- 
clusions here  reached  may  require  later  re\  ision. 

'  Lor.  lit.,  p.  .^04. 

-  Mut  not  as  a  correct  estimate  of  M'V  for  the  equation  of  eNrh,mge' 
Wo  .1  .  not  know  what  |)art  of  these  checks  were  used  in  "trade."  Cf  our 
discussion  of  the  estimate  of  T,  in/ra. 


THE   REDISCOVERY  OF   A   BURIED  CTTV 


361 


questioning  that  "check  deposits"  and   M'V  are  iden- 
tical. 

What,  however,  shall  we  say  of  M'V"  for  other  years? 
In  the  calculation  of  this,  Professor  Fisher  relies  on  the 
absolute  figures  for  1909  (and  1896,  similarly  calculated), 
together  with  an  "index"  based  on  New  York  and  country 
clearings.  In  this  index  he  weights  country  clearings  by  5,' 
and  New  York  clearings  by  i.  The  result  is,  of  course, 
that  country  clearings  dominate  the  index.  But  New 
York  clearings  are  inuch  more  variable  than  country  clear- 
ings. I'he  range  of  variation  in  New  York  clearings  for 
the  years  1897  to  1908,  inclusive,  is  from  33.4  billions  in 
1897,  to  104.7  billions,  in  1906;  the  latter  figure  being 
more  than  three  times  as  great  as  the  former.  The  range 
in  country  clearings  is  from  23.8  billions,  in  1897,  to  57.8 
billions,  in  1907,  the  latter  figure  being  2  10/23  ^^  great  as 
the  former.  But  more  significant  is  the  degree  of  year  by 
year  variability.  The  country  clearings,  with  the  excep- 
tion of  1908,  always  rise, — a  steady,  if  not  quite  symmet- 
rical, increase.  New  York  clearings,  however,  go  up  and 
down,  42  billions  in  1898,  60.8  billions  in  1899,  52.6  billions 
in  1900,  79.4  billions  in  1901,  66.0  billions  in  1903,  104.7 
billions  in  1906,  87.2  billions  in  1907,  79.3  billions  in  1908. 
New  York  clearings  are  highly  variable  in  both  directions, 
while  country  clearings  vary  almost  wholly  in  one  direc- 
tion, with  a  maximum  difference  of  6.4  billions  between 
any  two  consecutive  years,  and  with  an  average  yearly 
variation  of  only  3.5  billions.-  When  country  clearings 
are  weighted  by  5,  almost  all  of  the  high  degree  of  variabil- 


'  Kemmerer  does  not  ao  this,  but  takes  total  clearings  for  the  countrj-  as 
his  index  of  variation.  Loc.  cil.,  1 18-120.  His  figures  for  "check  circula- 
tion" are,  thus,  more  variable  than  Fisher's.  In  this,  Kemmerer's  results 
are  much  to  !>«■  preferred. 

'  I  have  taken  the  figures  for  clearings  from  Professor  Fisher's  table,  loc. 
cit.,  i>.  448. 


1 1 


! 
tj 


H- 


li. 


if 


:!; 


*J 


362 


THE   VALUE   OF  MOXEY 


ity  of  New  York  clearings  is  covered  up,  and  volume  of 
checks  deposited  for  years  other  than  1909  and  1896  is 
thrown  hopelessly  away  from  the  facts.  It  is  too  large  by 
far  in  most  years.  In  1905,  1906  and  probably  1901  it  is 
too  small.  It  does  not  vary  nearly  enough.  As  V  for 
years  other  than  1909  and  1896  is  determined,  for  Pro- 
fessor Fisher's  equation,  by  dividing  the  M'V  thus  esti- 
mated by  the  M'  for  the  year,  it  is  clear  that  V  as  estimated 
by  Professor  Fisher  is  very  much  less  variable  than  it  is  in 
fact.  It  is  pretty  variable  even  in  his  figures,  but  his 
figures  do  not  nearly  show  how  variable  it  is.* 

Again,  this  undue  weighting  of  country  clearings,  swal- 
lowing up  New  York,  vitiates  Professor  Fisher's  estimates 
for  V,  the  velocity  of  money,  for  years  other  than  1909  and 
1896.  One  of  the  elements  in  the  calculation  of  V  is  the 
estimated  V'.^  Since  V'  is  wrong,  V  will  also  be  wrong. 
V  is  probably  much  more  variable  than  Professor  Fisher's 
figures  would  indicate.  With  great  admiration  for  the 
ingenuity  of  Professor  Fisher's  speculations  regarding  V,  I 
find  too  many  elements  of  conjecture,  and  too  many  arbi- 
trary assumptions,  to  give  me  confidence  in  the  figure  for 
any  year.  I  refrain  from  going  into  any  general  criticism 
of  his  method  of  calculating  V,  however,  contenting  myself 
with  the  one  clear  point  that,  to  the  extent  that  the  values 
of  y  for  years  other  than  1909  and  1896  depend  on  the 
estimated  M'V  for  those  years,  they  are  less  variable  than 
they  ought  to  be.'' 

The  same  conclusion  regarding  Professor  Fisher's  esti- 
mates for  V  have  been  reached,  by  a  different  method,  by 

'  Loc.  cit.,  p.  304.    Cf.  our  cha{)tcr  on  "\'eIocity  of  Circulation,"  suPra 

^Loc.o/.,  pp.  477-478. 

'There  is,  of  course,  the  further  point,  to  be  emphasized  in  the  discussion 
of  r,  infra,  that  MV  (and  hence  V),  assuming  the  calculaUon  otherwise 
correct,  k  too  hiree.  to  the  extent  that  it  includes  tax  payments,  loans  and 
repayments,  dealmgs  between  agent  and  principal,  etc.  But  this  criticism 
does  not  so  clearly  apply  to  MV  a.s  it  does  to  M'V'. 


iii 


THE   REDISCOVERY  OF  A  BURIED  CITY 


363 


Professor  Wesley  C.  Mitchell.  He,  too,  concludes  that  V 
is,  in  fact,  more  variable  than  Professor  Fisher  would  in- 
dicate.' 

I  conclude,  therefore,  that  neither  V  nor  V  has  been 
correctly  calculated,  for  years  other  than  1909  and  1896.  I 
pass  now  to  a  consideration  of  T,  the  volume  of  trade,  after 
which  I  shall  consider  P,  the  price-level,  in  the  equation  of 
exchange. 

Let  us  first  recall  the  point  made  in  the  chapter  on  "The 
Equation  of  Exchange,"  that  P  and  T,  the  price-level  and 
the  volume  of  trade,  are  not  independent  even  in  idea.  If 
one  is  given  an  independent  definition,  the  other  cannot 
be  given  an  independent  definition.  If  the  equation  is  to 
be  true,  then  P  must  be  weighted  by  the  numbers  of  each 
item  (as  hats)  exchanged.  P  is  not  a  mere  average,  but  is 
a  weighted  average,  and  T  is  always  the  denominator  in  the 
formula  for  P.  In  developing  statistics  for  P  and  T,  there- 
fore, this  fact  must  be  kept  in  mind,  and  the  elements 
entering  into  each  must  coincide,  and  vary  together  year 
by  year. 

In  our  chapter  on  "The  Volume  of  Money  and  the  Vol- 
ume of  Trade,"  we  showed  that  the  great  bulk  of  trade  is 
speculation.  We  showed  that  the  indicia  of  variation 
which  Fisher  ^  and  Kemmerer  have  constructed  for  trade, 
dominated  by  inflexible  physical  items  of  consumption 
and  production,  give  wholly  misleading  results  for  every 
year  except  the  base  year.  They  give  a  steadily  growing, 
inflexible  figure,  with  little  variation  from  its  steady  path. 
Trade,   if   chiefly   speculation,   is  highly   flexible,   varies 


'  Business  Cycles,  p.  308. 

'  That  volume  of  trade  and  volume  of  physical  goods  are  virtually  inter- 
changeable in  Fisher's  thought  is  strikingly  illustrated  on  p.  195  of  the 
Purchasing  Power  of  Money:  "  A  doubling  in  the  quantities  of  all  commodities 
sold,  or  (what  is  almost  the  same  thing)  a  doubling  of  the  quantities  con- 
sumed."   Italics  are  mine. 


I.M 


•    '  ! 


;  I 


Bfiiiail 


364 


Tin:   VALUE  OF  MONKY 


enormously  from  year  to  year,  waxes  and  wanes.  This 
point  need  not  be  further  developed.  At  best  Fisher's 
ligure  for  trade  can  be  accepted  only  for  one  year,  1909. 

Is,  however,  the  figure  for  1909,  387  billions,  an  accept- 
able figure?  Is  it  not  decidedly  too  large?  It  is  made  up, 
it  will  be  recalled,  by  taking  the  figures  for  MV  and  M'V, 
adding  them  together  to  get  one  side  of  the  equation,  and 
declaring  them  equal  to  PT.  P  is  then  declared  to  be  Si, 
by  the  arbitrary  device  of  taking  as  the  unit  of  T  one 
dollar's  v.orth  of  every  sort  of  good  at  the  prices  of  1909. 
T  is.  then,  387  billions,  since  iMV  plus  M'V  equals  387 
billions.  The  theory  underlying  this  is  that  depo.iits  made 
in  banks  correctly  represent  trade.'  Our  criticisms  as  to 
the  absolute  magnitude  assigned  to  T  (and  hence  to  MV 
jilus  M'V)  will  rest  in  large  measure  in  challenging  this 
assumption.  It  is  our  contention  -  that  deposits  made  in 
banks  ver>'  greatly  overcount  trade. 

Deposits  made  in  banks  include  taxes  and  other  public 
revenues;  they  include  loans  and  repayments,  and  interest- 
paj-Tnents;  they  include  gifts  and  benevolences,  money  sent 
by  parents  to  children  away  from  home,  pensions,  pay- 
ments of  insurance  losses,  annuities,  dividends  on  stocks, 
pa>'ments  to  and  from  savings  and  loan  associations,  fines, 
contributions  to  churches,  and  other  non-commercial 
organizations,  etc.,  etc.     None  of  this  represents  trade. 

But  further,  whether  pajTnents  are  in  trade  or  not,  many 
times  indeed  does  it  happen  that  several  checks  are  drawn 
in  connection  with  the  same  transaction.    Professor  Kem- 

'  This  is  strictly  true  oril)-  of  the  part  of  T  which  comes  from  the  tigure 
for  M'V,  .(5^  liiiliiins.  In  taiculatiiif,'  M\  ,  I'rofcssor  Usher  introduces 
more  comi>lexilies,  into  which  we  shall  not  tnler,  as  the  absolute  amount 
is  small— only  ,u  hillions:  -  and  the  possible  error  from  this  source  not  great 
enough  to  affect  a  lalculation  where  jo  billions  one  way  or  the  other  is 
v^ilhin  the  "■  margin  of  error." 

-  Vide  Annalist,  Feb.  17,  Feb.  21,  March  (>,  March  13,  and  March  20,  1916, 
for  a  discussion  of  this  |)oint  by  Professor  I'isher  and  the  present  writer. 


THE   REDISCOVERY   OF   A   BURIED  CITY 


36: 


merer,  entertaining  this  possibility,  thought  it  might  be 
neutralized  by  cases  where  the  same  check  passes  through 
several  hands,  making  payments  in  several  different  trans- 
actions. He  calls  this,  however,  a  "gratuitous  assumption 
of  unverifiable  accuracy,"  '  and  makes  no  claim  to  have 
given  the  matter  careful  study. 

In  general.  I  think  it  safe  to  hold  that  the  case  where  a 
single  check  passes  through  several  hands  is  not  important. - 
It  will  happen  chiefly  with  small  checks  in  small  places,  or 
with  small  checks  paid  to  laborers.  It  is  the  pecuniary 
magnitude  of  checks,  rather  than  their  number,  that  counts 
here.  I  am  informed  by  several  bankers  that  large  checks 
are  almost  universally  deposited  at  once.  This  is  for  sev- 
eral reasons:  (i)  The  recipient  of  the  check  wishes  to  make 
sure  that  it  is  good.  (2)  It  is  unlikely  that  the  check  is  of 
the  right  size  for  another  transaction,  unless  the  recipient 
is  a  mere  agent  for  a  third  party,  in  which  case  he  should 
(but  commonly  does  not)  pass  it  on  to  his  principal,  if 
double  counting  is  to  be  avoided.  (3)  Every  person  who 
handles  sums  of  any  size  wishes  a  record  of  the  transaction, 
and  his  own  canceled  check  is  a  receipt  which  he  would  not 
have  if  he  passed  on  the  check  of  another. 

This  last  point  will  go  far  toward  explaining  why  bank 
transactions  may  multiply  without  a  corresponding  multi- 
plication of  trade.  The  banks  do  the  bookkeeping  for 
modern  business  in  increasing  degree.  Checks  are  records, 
of  high  legal  valu'j.    A  colleague  recently  told  me  that  he, 

'Op.  cit.,  pp.  iii-ii,^.  It  is  intercstinR  to  note  that  Kemmerer's  argu- 
ment takes  the  form  of  proving,  not  that  l)ank  transiictions  do  not  overcount 
trade,  l)Ut  merely  that  they  do  not  iiiidfrcoiiiit  trade.  With  this  contention 
I  am  in  hearty  aKreemi-nt;  The  oxercountinK  is  worse  in  Kemmerer  s  fiR- 
ures  for  i8()(i  than  for  I'islier's  in  kjoo,  sinie  the  i8g()  fiKures  inchided  de- 
|K)sits  made  liy  one  l)ank  in  another,  while  the  kjchj  linures  do  not.  L'f. 
Kemmerer,  p.  ro.v  and  Kinley,  in  Report  of  the  Comptroller  for  iSgO  and  in 
the  ii>OQ  monograph,  passim. 

■  Vide  the  present  writer's  discussion  in  the  Annalist,  March  6,  191(1, 
P-  313- 


366 


THE  VALUE  OF  MONEY 


in  his  own  capacity,  had  just  drawn  a  check  to  himself, 
as  trustee,  transferring  a  sum  from  one  account  to  another. 
Another  colleague,  with  eight  different  bank  accounts, 
estimates  that  over  $0%  of  the  deposits  in  three  of  them 
represent  transfers  from  other  accounts.  This  kind  of 
duplication,  where  trust  relations  are  involved,  is  enormous. 
Intercorporate  relations  and  separate  bank  accounts  within 
a  corporation  complicate  it  still  further. 

A  check  is  drawn  by  a  subsidiary  corporation  to  its  divi- 
dend account,  and  deposited;  a  check  on  this  dividend 
account  '  is  then  deposited  in  the  general  account  of  the 
parent  coryjoration;  a  third  deposit,  of  the  same  funds,  is 
then  made  in  the  dividend  account  of  the  parent  corpora- 
tion; a  fourth  deposit  of  the  same  funds  is  made  in  a  trust 
fund  which  holds  stock  in  the  parent  corporation;  a  fifth 
deposit  in  the  personal  account  of  the  beneficiary  of  the 
trust  fund;  a  sixth  deposit  may  be  made  of  a  check  on  this 
fund  in  the  personal  account  of  the  beneficiary's  wife. 
The  first  three  of  these  deposits,  at  least,  will  be  made  of 
the  total  diviJ.  ad  of  the  subsidiary  corporation.    Not  one 
of  these  six  deposits  represents  trade.    Pa>Tnents  of  wages 
and  rents  should  count  as  trade,  but  payments  of  interest 
and  dividends  stand  on  a  separate  footing.    When  a  man 
has  bought  a  stock  or  a  bond,  he  has  already  bought  all  the 
income  which  is  to  come  from  them,  and  to  count  the  inter- 
est and  dividends  as  separate  items  is  double  counting. 
They  are  payments,  but  not  trade.    Even  if  the  dividend 
payment  be  counted  as  trade,  however,  it  is  counted  six 
times. 

There  is  enormous  overcounting  as  a  consequence  of  the 
combinations  of  corporations,  each  of  which  retains  its 

'  I  am  informed  by  Mr.  B.  F.  Smith,  Treasurer  of  tlie  Cambridge  Trust 
Company,  that  the  practice  of  having  separate  dividend  accounts  is  a  very 
widespread  one,  especially  with  the  larger  corporations. 


1       I: 


THE   REDISCOVERY  OF  A   BURIED  CITY 


367 


own  numerous  bank  accounts.  The  Interstate  Commerce 
Commission  calls  attention  to  great  duplications  from  this 
cause  in  connection  with  railway  income  accounts.'  Even 
within  single  corporations  the  duplications  -  are  very  great. 
Thus,  the  local  agent  of  a  railroad  deposits  his  rece'.,cs  in  a 
local  bank.  His  check,  or.  more  usually,  the  draft  of  the 
bank,  is  subsecjuently  deposited  in  a  bank  at  headquarters. 
Subsequent  disbursements,  in  places  away  from  head- 
quarters, particularly  of  wages,  will  frequently  be  preceded 
by  deposits  in  other  local  banks.  This  duplication  will  be 
true  of  telegraph,  telephone,  insurance  and  other  companies 
which  have  scattered  agencies,  including  the  wholesale 
trade.  Advertising  agencies  will  illustrate  it.  All  checks 
between  agent  and  principal,  customer  and  broker,  etc., 
will  illustrate  it.  There  is  a  great  deal  of  double  counting 
in  stock  transactions  from  this  source.  Thus,  a  Boston 
broker  takes  orders,  with  a  check  for  margin,  for  execution 
in  New  York.  The  order  is  executed  by  a  New  York 
broker,  who  deals  with  another  New  York  broker,  who 
represents  a  Loui  '  '  ^  broker,  who  represents  a  Louisville 
client.  Now  to  th  xtent  that  any  checks  at  all  pass  be- 
tween the  Boston  broker  and  his  client,  the  Boston  broker 
and  the  New  York  broker,  the  other  New  York  broker  and 

'  statistics  of  Railways,  190Q,  p.  71. 

*  Professor  Fisher,  in  his  AniiaJist  article  01  Feb.  21,  1916,  quotes  Dean 
Kinley  (The  i'sc  of  Credit  Instruments,  p.  151),  as  holding  that  duplications 
have  largely  been  eliminated  from  his  IQ09  figures.  Professor  Fisher  over- 
looks the  fact  that  Dean  Kinley  is  here  referring,  not  to  money  value  of 
trade,  but  merely  to  volume  of  checks.  Dean  Kinley  merely  indicates  that 
by  eliminating  deix)sits  made  by  one  bank  in  another,  he  has  avoided  having 
the  same  check  counted  in  de[)osits  made  in  two  or  more  banks  on  the  same 
day.  Even  this  is  not  wholly  avoided.  (/6/(/.,  pp.  158-15Q.)  It  was  extensive 
in  the  i8q6  figures  Dean  Kinley  thinks,  properly  enough,  that  he  has  a 
sufficiently  close  approximation  to  the  volume  of  checks,  for  the  reporting 
banks,  but  what  the  checks  were  drawn  for  he  does  not  undertake  to  say. 
His  problem  was  payments,  not  trade.  From  the  angle  of  volume  of  trade, 
he  finds  duplications  even  in  the  retail  deposits  (Jour,  of  Polit.  Econ.,  vol.  5, 
p.  165)- 


.^68 


Titr;  vvi.iT  or  movfy 


'  -ii 


iS^^ 


:| 

1 
i 

1 

..  s 

id 

Ij 

;  I'  - 

thi-  Louisville  broker,  or  the  Louisville  broker  an.l  his  client, 
we  have  overeoutUinK.     Only  the  ilurk  between  the  tw.i 
New  \ork  brokers  is  proiK-rly  lounleil.     ft  is.  of  i-ourse, 
well  known  that  u  small  percentage  of  the  (iealinRs  of  ;i 
customer  of  a  brokerage  house  is  represented  by  checks 
between  broker  and  customer.     Professor  Fisher  states  this 
to  be  about  5',.'     It  is.  however.  s''i  of  overcounting! 
Moret^ver,  through  keeping  "o|)cn  accounts."  with  irregular 
settlements  of    "  margins  "  only,   the  Boston  broker  and 
the  New  York  broker  reduce  markedly  the  checks  passing 
between  them.     There  is  a  back  and  forth  fl(,w  of  items 
which  in  large  degree  cancel  one  another,  since  the  Boston 
broker  sells  in  New  York  as  well  as  buys  there,  and  the  New 
\'ork  broker,  to  a  less  degree,  both  buys  and  stalls  Boston 
securities,  through  his  Boston  correspondent.     But  not  all 
by  any  means  is  canceled,  and  all  the  checks  that  pass  in 
this  way  represent  double  counting.    The  total  is  large. 

Public  funds  are  included  in  the  deposits  reported  to 
Kinley.  Taxes  are  not  trade.  Double,  triple  and  multiple 
counting  comes  as  revenues  are  received  by  local  authori- 
ties, transferred  to  State  accounts,  subsequently  redis- 
tributed to  local  accounts,  or  to  the  treasurers  of  State  in- 
stitutions, transferred  from  one  bank  to  another,  etc.  The 
State  of  Massachusetts  scatters  its  deposits  in  banks  all 
over  the  State,  and  makes  transfers  from  one  account  to 
another.  The  City  of  Boston  has  many  bank  accounts. 
The  Federal  Treasury  deals  largely  with  banks  over  the 
country. 

Whenever  a  retail  store  has  branches,  duplications  are 
likely  to^  occur.  ' '  Chain  stores ' '  make  great  overcounting. 
"Kiting"  swells  bank  deposits. 

Replying  to  these  contentions,  Professor  Fisher  has  urgetl 
that  there  is  large  under  counting,  also,  and  that  the  under- 

'  Aimalist,  March  13,  1916,  p.  344. 


THE   RKUISCOVERY  OF  A   BURIED  CITY 


Jf>9 


counting  balances  the  overcounting.  I  have  myself  called 
attention  to  a  gcMxl  deal  of  undercounting  in  the  chapter  on 
"Barter."  A  substantial  amount  of  ordinary  trade  is 
carri&  on  by  means  of  partially  offsetting  book-credit,  time 
bills  of  exchange,  simple  barter,  etc.  The  amount  might 
e\en  run  high,  as  com{)ared  with  ordinary  trade,  when  the 
clearing  arrangements  in  the  stock  and  pnxluce  exchanges 
are  taken  into  account.  But  it  is  impossible  to  figure  out 
anything  at  all  in  this  line  which  is  to  be  compared  with 
the  great  gap  between  the  141  billions  of  trade  we  were  able 
to  find,'  and  the  387  billions  Professor  Fisher  assigns  to 
trade.  The  gap  of  over  245  billions  is  much  too  great. 
Besides,  in  our  141  billions,  we  have  counted  barter  items, 
book-credit  items,  time-bill  of  exchange  items,  etc.,  alieady. 

The  main  item  of  undercounting  must  be  in  connection 
with  the  clearing  arrangements  in  the  speculative  exchanges. 
This  would  seem  to  be  Professor  Fi.sher's  view,  as  well.* 
Data  are  at  hard  for  the  two  great  exchanges  of  the  coun- 
try which  enable  us  to  measure,  with  some  precision,  the 
amount  of  the  undercounting  -/.  e.,  to  tell  the  extent  to 
which  checks  are  dispensed  with  in  the  trading  of  these  two 
great  exchanges.  The  two  exchanges  are  the  Chicago 
Board  of  Trade  and  the  New  York  Stock  Exchange. 

For  the  New  York  Stock  Exchange,  figures  are  taken 
from  Pratt's  Work  of  Wall  Street.  1912  ed.,  pp.  160-167. 
180,  273.  The  figures  are  for  the  big  year,  1901,  when  266 
million  shares  were  sold,  more  than  in  1909  by  51  millions 
of  shares,  and  when  the  Stock  Exchange  Clearing  House 
should  have  done  better,  in  the  magnitude  of  the  under- 
counting,  than  it  did  in  1909.     Figures  since  1901  are, 

'  Chapter  on  "Volume  of  Money  and  Volume  of  Trade,"  pp.  241-248. 
We  really  did  not  "find"  nciiriy  th;if  much.  The  figures  assigned  to  retail 
and  wholesale  trade  rest  on  fiKures  for  retail  and  wholesale  bank  "deposits," 
and  are,  es|K-(  iilly  the  wholesale  finures,  much  too  large. 

'^  Annalist,  leb.  .n  and  March  13,  igi6. 


V 
I 


lii ' 

1    ^  ' 

i  ' 

370 


THE   VALUE   OF   MONEY 


Pratt  states,'  not  available.  Pratt  also  gives  figures  for 
1893,  but  iloes  not  give  data  as  to  the  percentage  of  stocks 
handled  by  the  Clearing  House,  so  that  comparison  with 
the  1 901  figures  cannot  be  made. 

In  1901,  265.944,659  shares  were  sold.  Of  these,  15% 
were  "X-Clearing  House,"  /.  e.,  not  on  the  list  of  stocks 
handled  through  the  Stock  Exchange  Clearing  House. 
This  1^%  was  paid  for  in  full  by  check.  The  bond  sales 
arc  not  cleared,  and  so  another  billion  dollars  of  checks  is 
required  for  this  item.^  If  we  assume  (on  the  basis  of  the 
estimates  given  to  the  writer  by  DeCoppet  &  Doremus,  and 
Mr.  Byron  W.  Holt,  for  recent  years)  that  25%  of  the  100 
share  sales  would  be  added  If  "odd  lots"  were  counted,  we 
have  another  large  item  that  docs  not  go  to  the  Clearing 
House.  "Private  clearings"  reduce  the  number  of  checks 
in  connection  with  odd  lots,  but  not  so  effectively  as  is  the 
case  with  hundred  share  sales  put  through  the  Clearing 
House.  So  far  the  Clearing  Hou-se  has  done  nothing.  What 
did  it  do  with  the  85%  of  the  stocks  in  hundred  share  lots 
offered  for  clearing? 

The  figures  arc  perfectly  definite.  •  The  85%  of  the  266 
million  shares  sold  was  226  million  shares.  The  "share 
balance"  remaining  after  the  Clearing  House  had  done  its 
best  was  134  million  shares.^  The  number  of  shares  sold, 
then,  for  which  checks  did  not  have  to  pass  as  a  result  of 
the  clearing  process  was  93  millions.  In  terms  of  dollars, 
we  may  put  the  same  figures.  The  estimated  money-value 
of  the  266  million  shares  sold  was  20.5  billions;  ^  85%  of 
this  is  17.425  millions.  The  certifications  required  to  pay 
for  the  134  mill)  m  share  balance  was  10.930  millions.  The 
saving  in  checks  was.  thus.  6.495  millions  of  dollars.  This 
is  the  full  extent  to  which  the  Stock  Exchange  Clearing 


'  Loc.  cil..  p.  180. 

^  Ibid.,  \!\>.  166-ic;;;  1S7; 


■■'  Pratt,  loc.  cil.,  p.  iC6. 
*  Ibiii..  p.  1S7. 


THE  REDISCO\'ERY  OF  A  BURIED  CITY 


371 


House  undercounts  recorded  share  sales.    This  is  less  than 
1.7%  of  Professor  Fisher's  387  billio  i!    To  offset  this, 
however,  we  have  oz'^rcounting  in  the  5%  of  checks  for  all 
dealings  on  the  Exchange  which  pass  between  brokers  and 
customers,  as  shown,  and  all  the  checks  between  brokers 
and  out-of-town  brokers.    We  shall  also  find  items  of  oi«r- 
counting  which  vastly  more  than  offset  this  undercounting, 
in  loan  transactions  between  brokers,  and  between  banks 
and  brokers,  to  which  we  shall  shortly  give  attention. 
'     This  six  and  a  half  billions  in  checks  sr.ved  on  account  of 
sales  of  stocks  is  no  small  matter,  absolutely.    But  this, 
though  measuring  the  extent  of  undercounted  sales,  by  no 
means  measures  the  services  of  the  Clearing  House  to  the 
Stock  Exchange.    Not  merely  stocks  sold  have  to  be 
cleared.    Stocks  borrowed  are  also  cleared.    Borrowing  of 
stocks  is  not  trade,  but  borrowing  of  stocks  requires  the 
passage  of  money  and  checks.    When  stocks  are  borrowed, 
money  is  loaned.    A  bear  sells  short.    He  has  to  deliver 
next  day.    He  accomplishes  this  by  having  his  broker 
"borrow"  the  stock  he  needs  from  a  broker  representing  a 
bull,  who  is  long  on  the  stocks,  and  who  needs  money  to 
"carry"  them.    The  bull,  who  lends  the  stock,  receives 
dividends  from  the  bear,  as  they  accrue,  and  pays  the  bear 
interest  on  the  money  lent.    An  enormous  lot  of  this  takes 
place.    Moreover,  to  some  extent,  these  transactions  are 
increased  artificially,  in  order  that  the  broker  may  make 
his  "clearing  sheet"  misleading,  and  avoid  revealing  his 
position  with  reference  to  the  market.  *    Loans  of  stock  and 
sales  of  stock  appear  alike  in  the  transactions  of  the  Clear- 
ing House.    Moreover,  apart  from  the  necessities  of  the 
bears  for  stocks  to  deliver,  we  have  the  necessities  of  the 

•  Emery,  Speculation  on  the  Stock  and  Produce  Excfianges,  pp.  89;  74-95. 
A  Boston  broker  expresses  the  opinion  that  the  magnitude  of  artificial  boi- 
rowmg  to  make  the  clearance  sheet  misleading  is  not  great,  so  far  as  Boston 
is  concerned.    I  have  got  no  estimates  for  ^'ew  Vork. 


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372 


THE  VALUE  OF  AIONEY 


bulls  for  money  to  carry  their  stocks.  If  a  broker  who  has 
borrowed  largely  from  the  banks  finds  his  customers  turn- 
ing to  the  bear  side  of  the  market,  he  has  an  excess  of  funds. 
He  may  repay  his  loans,  but  they  may  be,  in  part,  time 
loans,  and  in  any  case,  he  may  find  it  just  as  well,  if  he  can 
makf  a  small  fraction  of  i^(  in  interest,  to  lend  to  another 
broker,  among  whose  customers  the  bulls  are  increasing. 
A  vast  deal  of  money  is  thus  transferred,  on  collateral 
security,  by  means  of  "loaning  stocks."  Brokers  prefer 
to  borrow  money  from  one  another  in  this  manner,  since  no 
margins  are  required,  in  general,  whereas  banks  would  re- 
quire margins.  These  various  reasons  make  a  vast  deal 
of  "borrowing  and  carrying"  transactions,  and  a  regular 
place  is  set  aside  for  them  on  the  Floor — Post  4,  commonly 
called  the  "Money  Post."  At  this  post,  also,  the  banks, 
through  brokers,  lend  on  call,  and  the  publish'  J  call  rates 
are  established  there.  Of  this,  however,  we  shall  have 
more  to  say  later. 

The  extent  to  which  this  loaning  of  stocks  takes  place 
at  the  "Money  Post,"  as  compared  with  the  loaning  done 
privately,  varies.  It  makes  no  difference,  however,  from 
the  standpoint  of  the  volume  of  these  transactions  that  go 
to  the  Clearing  House  whether  they  are  put  through  at  the 
"  Money  Post "  or  outside.  The  loans  made  by  the  banks  at 
the  "Money  Post"  do  not  affect  the  Stock  Exchange  Clear- 
ing House  totals. '  Formerly  the  "  Money  Post "  was  a  place 
where  the  position  of  the  bears  could  be  gauged  in  a  given 
stock.  If  the  demand  for  a  stock  was  great,  the  bulls  could 
take  heart,  and  increase  the  pressure.  To  av'oid  giving 
away  this  information,  however,  borrowing  is  done  on  a 
large  scale  privately,  at  present.^  Of  course,  if  the  pres- 
sure gets  too  strong,  it  will  manifest  itself  at  the  money 

'  The  banks,  of  course,  are  not  horrowinn  stocks. 

^  Van  Antwerp,  TIte  Slock  Exchange  from  Within,  New  York,  1913,  p.  29a 


THE  REDISCOVERY  OF  A  BURIED  CITY 


373 


post  anyhow,  since  bears  borrowing  particular  stocks  will 
forego  all  or  parL  of  the  interest,  or  even  pay  a  premium 
for  the  stock.' 

Now  it  is  possible,  from  the  figures  given  for  the  total 
clearings  of  the  Stock  Exchange  Clearing  House,  in  con- 
junction with  the  figures  of  recorded  sales,  and  the  percent- 
age of  "X-Clearing  House"  sales,  to  get  a  fairly  accurate 
idea  of  the  magnitvk  of  these  stock  borrowing  operations 
between  brokers.  The  total  number  of  shares  offered  for 
clearing  by  "both  sides'"  in  igoi  was  926,347.300!  This  is 
double  the  actual  amount,  since  both  buyer  and  seller  report 
the  same  transaction  to  the  Clearing  House,  the  former  with 
a  "receive  from"  sheet,  and  the  latter  with  a  "deliver  to" 
sheet.  Half  this  amount,  or  463,173,650  shares,  represents 
the  actual  number  of  shares  to  be  handled.  As  we  have 
seen,  226  millions  of  this  (85%  of  the  recorded  sales  of  266 
millions)  represents  sales.  The  rest,  or  237,173,650, 
represents  borrowing  of  stocks.  ^  Borrowing  exceeds  ac- 
tual sales,  if  the  figures  for  1901 — a  year  of  enormous  sales 

'  It  r  ■  ently  hapi)ened  that  .\laska  Gold  was  being  "loaned  flat"  on  the 
Boston  Stock  Exchange,  which  was  a  prelude  for  a  six  point  advance  in  the 
next  two  or  three  days,  as  the  bears  were  driven  to  cover. 

'•'  One  factor  complicates  this.  .Are  all  the  hundred  share  sales  recorded? 
In  our  chapter  on  "Volume  of  Money  and  Volume  of  Trade,"  we  called 
attention  to  a  statement  to  the  effect  that  brokers  get  together  before  the 
market  opens,  and  compare  "stop  loss"  orders,  matching  these  with  other 
orders,  with  the  understanding  that  they  automatically  go  into  effect  if 
tlie  "market"  reaches  the  prices  indicated.  The  statement  indicated  that 
this  substantially  increases  sales  beyond  the  recorded  totals,  as  such  sales 
do  not  get  on  the  ticker.  I  think,  however,  that  this  cannot  throw  our 
reckoning  out  greatly.  The  great  majority  of  sales  are  not  on  "stop  loss" 
orders.  None  of  the  sales  of  "floor  traders,"  who  average  a  third  of  the 
total  trading  {Pujo  Committee  Report,  Feb.  28,  IQ13,  p.  45),  would  be  on 
"stop  loss"  orders.  Thr  bulk  of  the  rest  is  not.  Moreover,  not  all  stop  loss 
orders,  by  any  means,  would  be  executed  in  this  manner.  It  is  not  easy  to 
see  how,  under  the  rules  and  practices  of  the  Exchange,  many  other  sales 
could  go  unrecorded,  except  on  days  of  greatest  stress.  On  September  25, 
IQ16,  when  over  2,300,000  shares  were  sold,  the  daily  pai)er  spoke  of  sales 
missed  by  the  ticker,  which  was  swami>ed  with  sales  to  be  recorded,  as  an 
item  of  some  magnitude.    But  the  Ticker  is  wonderfully  efficient.    It  some- 


il!  I 


U 


I'  f 


374 


THE  VALUE   OF  MONEY 


—are  representative.    We  have,  now,  an  explanation  of 
the  prevailing  opinion  among  brokers  that  the  Stock  Ex- 
change Clearing  House  dispenses  with  the  major  part  of 
the  checks  that  would  otherwise  be  required.    For  their 
purposes,  it  does  make  a  vast  difference.    Pratt's  figures  * 
show  that,  without  the  Clearing  House,  certifications  of 
$27,995,896,400  would  have  been  required;  that  certifica- 
tions of  $17,065,042,800  were  obviated  ■  by  the  Clearing 
House,  leaving  the  balance  of  $10,930,853,600  of  certifica- 
tions which  had  to  be  used.    This  balance,  as  we  have  seen, 
is  the  major  portion  of  what  would  have  had  to  be  paid 
anyhow  for  the  stocks  actually  sold  and  offered  for  clear- 
ing.   The  saving  on  the  actual  sales  is  only  6.5  billions. 
But  the  saving  to  the  brokers  was,  of  course,  much  greater. 
Even  six  and  a  half  billions  is  no  slight  matter  for  any  pur- 
pose except  the  explanation  of  our  245  surplus  billions! 
Pratt  gives  an  estimate  at  another  place  of  the  certifications 
required  by  the  Stock  Exchan,    sales,  reaching  virtually 
the  same  conclusion  that  we  have  reached  by  a  somewhat 
different  combination  of  his  figures.    He  indicates  that  14 
billions  of  certifications  were  required,  counting  in  the 
bonds,  in   1901.'    This  compares  with  the  20.5  billions 
estimated  value  of  stocks  sold,  and  approximately  one 
billion  of  bonds.    This  leaves  7.5  billions  of  certifications 
obviated  on  sales.     This  takes  no  account  of  the  "odd 
lots."    If  they  run  to  an  additional  25%,  we  have  five 

times  gets  behind  the  market  by  several  minutes,  but  it  rarely  misses  any- 
thmg,  under  ordmary  conditions. 

^Ibid.,  p.  166. 

'  This  explains  the  estimates  of  Wall  Street  men  that  the  Clearing  House 
reduces  checks  by  two-thir.ls.  I'or  their  purposes,  the  saving  is  almost  that 
niuch,  of  the  Items  offered  for  clearings.  Cf.  Van  Antwerp,  The  Stock  Ex- 
change  from  li'Uhin,  pp.  121-122. 

'Ibid.,  p  273  There  is  one  billion  difference  between  Pratt's  estimate 
and  mme.  I  mclme  to  the  view  that  mine  is  correct,  the  more  as  he  puts  his 
Ugure,  14  biUions,  as  a  safe  lower  limit.  But  a  bilUon  one  w.iy  or  the  other 
IS  tndmg! 


i    :.- 


THE   REDISCOVERY   OF  A   BURIED  CITY 


375 


billions  more  which  are  not  put  through  the  Clearing  House. 
My  information  is,  however,  that  "private  clearings  '  re- 
duce the  checks  in  connection  with  these,  though  not  so 
efficiently  as  is  the  case  with  the  big  Clearing  House. 

Do  the  figures  that  get  into  the  "all  other"  deposits 
from  those  connected  with  the  Stock  Exchange  under- 
count  sales  made  there?  Not  yet  have  we  taken  account 
of  an  item  which  swamps  all  that  we  have  considered.  I 
refer  to  loan  transactions  by  the  banks,  particularly  call 
loans.  The  volume  of  these  is  enormous.  At  the  "  Money 
Post"  alone,  the  figures  average  between  20  millions  and 
25  millions  a  day.'  The  range  is  from  10  to  50  millions. 
The  major  part  of  these  loans  are  not  made  on  the  Floor  of 
the  Exchange,  however,  but  privately,  between  banks  and 
brokers.  Even  on  the  Floor,  no  records  of  the  loans  are 
kept,  and  only  estimates  are  available.  For  the  loans  made 
privately,  no  figures  are  attainable  at  all.  The  total  must 
be  enormous.  One  authority  writes,  in  a  letter,  "The  total 
amount  of  money  loaned  at  the  post  varies  considerably, 
depending  upon  the  rate.  For  instance,  when  money  is 
under  3%,  loans  are  largely  made  directly  between  the 
banks  and  the  brokers,  but  when  it  gets  over  3%  and  gets 
strong,  more  loans  are  made  at  the  post.  Some  national 
banks  make  all  their  loans  there  right  along,  so  I  under- 
stand." My  information  from  an  officer  of  the  National 
City  Bank  is  that  it  lends  the  major  part  of  its  demand 
money  on  the  floor  of  the  Exchange.  The  other  chief 
lenders,  according  to  the  Pujo  Report, ^  are  the  National 
Bank  of  Commerce,  The  Chase  National,  the  Hanover 
National,  J.  P.  Morgan  and  Co.,  and  Kuhn-Loeb.    The 

'  An  official  of  the  Bankers  Trust  Company  has  secured  for  me  from  a 
broker  at  the  ".Money  Post"  an  estimate  of  20  to  25  miilions  as  an  average, 
with  so  millions  as  a  maximum,  for  1Q15.  The  Pujo  Committee,  in  its  re- 
port in  igi3,  p.  34,  gives  a  similar  estimate. 

'  P-  34. 


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THE   VALUE   OF   MONEY 


same  report  states  that  the  bulk  of  such  loans  are  made 
directly  between  banks  and  brokers,  and  not  at  the  "Monev 
Post."  ^ 

How  do  these  transactions  affect  Kinley's  figures  for 
deposits,  and  so  Fisher's  total  of  387  billions?  The  small 
dealer  deals,  usually,  with  one  bank.    When  he  borrows, 
he  gets  a  "credit"  on  his  deposit  account,  but  makes  mi 
"deposit"  that  would  get  into  Kinley's  figures.    But  stock- 
brokers deal  with  many  banks.    They  have  one  bank  which 
"certifies"  for  them,  and  with  which  they  regularly  keep 
a  "balance."    But  for  their  loans,  they  deal  with  whatever 
bank  gives  them  the  best  rate,  or  has  the  funds  to  spare. 
In  time  of  tight  money,  they  shift  their  loans  with  great 
frequency.    They  borrow  also  from  one  another.    "Money" 
is  "worth  money"  in  New  York,  and  idle  funds  will  be 
lent  by  whomever  has  them  for  whatever  the  market  will 
pay,  on  collateral  security  on  call.    When  a  broker  deposits 
money  in  his  bank  borrowed  from  another  bank  or  another 
broker,  he  gets  a  deposit  credit  which  does  get  into  Kin- 
ley's figures-he  deposits  a  certified  check,  or  a  bank  draft. 
The  following  has  been  described  as  a  typical  transacUon 
by  the  bond  expert  of  a  Boston  banking  house,  and  has  been 
amplified  by  several  Wall  Street  men  with  whom  I  have 
discussed  it.   A,  whose  home  bank  is  Bank  W,  has  borrowed, 
on  call,  $500,000  from  Bank  X.    Bank  X  calls  the  loan.' 
A  finds  Bank  Y  willing  to  lend  him  enough  to  pay  it  off. 
Before  he  can  get  the  new  loan  from  Bank  Y,  however! 
he  must  get  his  collateral  released  by  Bank  X.    Before  he 
can  do  that,  he  must  pay  off  the  loan  at  Bank  X.    His 
recourse,  then,  is  to  Bank  W,  his  regular  bank,  which  cer- 
tifies for  him.  and  with  which  he  keeps  his  balance.    Bank 
W  gives  him  a  certified  check  (either  an  overcertification, 
or  a  "morning  loan"  transaction  ).  for  §500,000,  with  which 
he  pays  off  the  loan  at  Bank  X.    He  then  takes  the  col- 


THE   REDISCOVERY  OF   A   BURIED  CITY 


377 


lateral  from  Bank  X  to  Bank  Y,  and  makes  a  new  loan. 
He  gets  a  draft  from  Bank  Y,  which  he  deposits  with  Bank 
VV,  and  then  draws  another  check  against  his  deposit  with 
Bank  W  to  pay  ofT  the  "morning  loan,"  in  case  the  trans- 
action took  that  form.    Here  are  three  checks  for  this  loan 
transaction,  two  of  which  get  into  clearings,  and  one  of 
which  gets  into  "all  other  deposits."    But  the  checks  may 
be  multiplied.    A,  instead  of  getting  a  new  loan  at  Bank 
Y,  may  call  a  loan  from  broker  B,  who  may  then  call  a  loan 
from  broker  C,  who  may  go  to  Bank  Y  to  get  the  funds  he 
needs  to  pay  B.    Here  are  two  new  checks  in  the  series, 
both  of  which  get  into  the  "all  other"  deposits.    Checks 
fly  about  recklessly  in  Wall  Street,   and  men  will  turn 
over  money  many  times,  if  an  eighth  of  i%,  or  less,  can 
stick  by  the  W".y,  on  a  good  sum,  for  a  few  days!     This  is 
strikingly  illusirated  by  a  fact  which  caught  my  attention 
in  the  monthly  bank  statement  of  a  brokerage  house  which 
I  was  allowed  to  examine.    The  deposits  made  during  the 
month,  and  the  checks  drawn  during  the  month,  balanced 
to  within  five  hundred  and  fifty  dollars  out  of  several  mil- 
lions.   The  broker  said  of  this:  "  It  would  be  true  even  for  a 
single  day,  and  it  would  be  true  for  a  year.    The  bank  re- 
quires us  to  keep  a  minimum  balance;  it  is  to  our  interest 
not  to  keep  more  than  that.    If  we  have  more  at  the  end  of 
the  day,  we  lend  it  out;  if  we  have  less,  we  borrow  to  make 
up  the  deficiency.    We  try  to  have  just  that  balance,  and 
no  more,  to  our  credit  at  the  bank  at  the  end  of  every  day." 
The  handling  of  funds  by  a  brokerage  house  is  a  fine  art, 
involving  both  technical  skill  and  a  philosophic  grasp  of  the 
factors  of  the  "money  market."     Are  rates  going  up? 
Then  it  is  well  to  reduce  call  loans,  and  borrow  more  on 
time.    If  lower  rates  are  anticipated,  more  call  money  will 
be  employed     \vith  the  possibility  of  a  "squee7.e"  if  ttK> 
much  is  taken  that  way.    Hidden  dangers  must  be  foreseen. 


If- 


^1!  • 


life' 


378 


THE  VALUE  OF  MONEY 


The  sums  borrowed  are  enormous,  and  brokers'  profits 
dei)end  in  very  substantial  degree  on  their  skill  in  borrowing 
as  cheaply  as  possible,  and  in  utilizing  their  funds  to  the  ut- 
most. 

It  is  here,  I  think,  in  loan  transactions  between  banks  and 
brokers  and  between  brokers,  that  we  have  a  major  part 
of  the  explanation  of  the  huge  deposit  figures  for  New  York 
City,  and  for  the  tremendous  influence  of  stock  sales  on 
clearings,  which  Mr.  Silberling's  ■  figures  show.     This  is 
the  opinion  of  Professor  O.  M.  W.  Sprague,  who  first  called 
my  attention  to  the  volume  of  call  loans,  and  rapid  shifting 
of  call  loans,  in  New  York,  and  it  is  the  opinion  of  every 
Wall  Street  man  with  whom  I  have  discussed  the  matter. 
The  actual  pecuniary  magnitude  of  the  share  sales  and 
bond  sales  is  not  enough  to  do  it.    The  mass  of  connected 
loan  transactions,  however,  substantially  greater  in  volume 
than  the  actual  sales  of  securities,  is,  with  the  security 
sales,  enough  to  do  it. 

When  the  call  rate  is  high,  which  will  particularly  happen 
when  bank  reserves  are  low,  the  shifting  in  loans  will  be 
much  increased.    One  bank  will  have  money  to  lend  one 
day,  but  the  next  day  will  have  to  call  it,  to  meet  heavy 
demands  at  the  Clearing  House,  while  some  other  bank 
will  have  the  surplus  funds  to  lend.    The  brokers,  by  bid- 
ding up  the  rate,  will  tempt  the  temporary  lending  even 
of  small  surpluses,  if  their  necessities  are  great.     The 
volume  of  "all  other  deposits"  and  of  bank  clearings  will 
be  swelled  by  this  much  beyond  ordinary.     That  this 
should  not  be  revealed  to  ordinary  statistical  tests  is  due 
to  the  fact  that  speculation  tends  to  fall  off  at  such  a  time, 
so  that  the  other  factors  in  the  stock  exchange  operations 
tenr'  to  reduce  daily  deposits  and  bank  clearings.     Mr. 
Silberling  has  apphed  to  this  problem  the  technique  of  a 

'  Annalist,  Aug.  14,  1916. 


THE   REDISCOVERY   OF  A   BURIED  CITY 


379 


refinement  of  the  correlation  method,  the  method  of  par- 
tial correlation,  with  the  result  of  confirming  this  view.' 

1  conclude,  therefore,  that  stock  exchange  transactions, 
instead  of  being  undercounted  in  bank  deposits,  are  very 
greatly  overcounted.^  The  big  item  that  does  it  is  loan 
transactions  between  brokers  and  brokers  and  between 
brokers  and  banks. 

The  evidence  from  the  Chicago  Board  of  Trade,  with 
reference  to  the  extent  of  clearings  within  the  exchange 
there,  comes  in  a  letter  from  the  Secretary  of  the  Board  of 
Trade  to  Professor  Taussig.    The  only  clearing  house  trans- 

'  N.  J.  Silberling,  "The  Mystery  of  Clearings,"  Annalist,  Aug.  14,  1916, 

p.   22},. 

2  Tlicre  is  one  further  piece  of  evidence  which  has  been  obtained  through 
the  courtesy  of  a  New  York  broicerage  house.  .\t  the  request  of  the  gentle- 
man who  has  supplied  the  figures,  I  have  altered  them  by  a  constant  per- 
centage, to  prevent  (xissible  identification,  but  the  proportions  among  them 
hold  as  they  were  given.  The  figures  show  the  business  of  the  house  for 
the  month  of  March,  1916.    The  figures  show: 

Market  value  of  stocks  and  bonds  bought, 1,644,630 

Total  dei>osits  made  during  month i ,M5'S02 

Average  borrowed  from  banks, 95^,000 

For  this  house,  then,  for  this  month,  the  deposits  were  less  than  the 
value  of  securities  sold,  by  11.5%.  The  month,  however,  was  unusual. 
It  was  a  month  of  reduced  activity,  following  large  activity.  This  is  strik- 
ingly shown  by  the  figure  for  the  aiwa,i;r  bank  loans  for  the  month — over 
two-thirds  of  the  total  deposits  for  the  month.  The  house  had  a  large  bull 
rlicntilc,  which  was  holding  its  stocks,  and  not  selling  on  a  bear  market. 
The  tui-nover  was  very  slow,  as  Wall  Street  goes.  It  was  a  time  of  e.xtraor- 
dinarily  easy  money  when  banks  called  few  if  any  loans.  The  broker,  in 
exi)lanation  oi  his  figures,  says:  "The  most  of  our  checks  were  to  other 
brokers.  Checks  to  banks  about  eciualcd  checks  to  customers.  Your  as- 
sumption that  we  did  not  pay  off  many  loans  in  March  is,  I  think,  right." 
The  same  broker  states  in  another  letter  that  he  thirks  that,  in  general, 
the  bulk  of  checks  to  and  from  brokers  are  in  dealings  with  banks.  In  this 
month,  then,  with  this  factor  reduced  to  a  minimum,  we  still  have  de- 
posits undercounring  sales  by  only  11.5%-  The  figures  do  not  prove  my 
thesis  that  brokers'  deposits  greatly  overcount  their  sales,  but  they  at  least 
show  t'  t  they  do  not  greatly  undercount  them.  In  view  of  the  peculiarities 
of  the  month  chosen,  with  transactions  between  banks  and  brokers  cut  to 
the  minimum,  they  are  quite  consistent  with  the  contention  that  normally 
the  brokers'  deposits  will  much  exceed  their  sales. 


it 

i 


!p<' 


,}«o 


TJIK    VALL't   OK   M()M;v 


actions    are  in  connection  with   "futures."     All  "spot" 
transactions  are  paid  in  full  by  check.    All  futures  other 
than  those  offset  by  clearing  are  j>aid  in  full  by  check     The 
total  amount  put  through  the  Clearing  House  in  1915  was 
118  millions,  of  which  the  balances  paid  were  41  millions 
saving  checks  to  the  extent  of  77  millions).    This  77  mil- 
hons  IS  a  trifle  indeed  as  compared  with  the  gap  of  24:  bil- 
lions we  are  trying  to  fill!    It  is  a  trifle  also  as  compared 
with  the  business  done  on  the  Board  of  Trade.    The  Sec- 
retary estimates  that  commodities  to  the  value  of  S375  cx>o  - 
000  actually  arrived  on  the  exchange  in  1915.    On  the  aver- 
age,  the  figure  would  be  sSjso.ooo.cxjo.     For  the  Stock 
^ards     'it   IS   approximately    the   siime-last   year   was 
S375.coo.ooo.     Of  fruits,  vegetables,  poultry,  butter  egcs 
etc.,  sold  in  South  Water  Street,  it  is  claimed  by  their  stat- 
isticians  the  value  is  8350.000,000,  or  a  total   of  about 
ek^ven  hundred  millions  arrivinfi  (Italics  mine]  yearly  at 
this  great  market  place,  all  of  which  is  paid  for  by  checks 
and  when  the  ownership  changes,  the  change  of  ownershiii 
IS  always  paid  by  check."    How  many  times  the  goods 
change  hands,  cannot  be  stated  on  the  basis  of  records 
of  the  Board  of  Trade.     The  Secretar>'  contents  himself 
with  saying  that  they  are  ".sold  and  resold  many  times  " 
VVe  have  discussed  this,  on  the  basis  of  reputed  figures  of 
the  Federal  tax  on  grain  futures  in  1915.  in  our  chapter  on 
Volume  of  .Money  and  Volume  of  Trade."    In  any  case 
It  IS  clear  that  the  77  millions  of  checks  economized,  though 
absolutely  great,  is  relatively  a  bagatelle.    It  is,  moreover 
more  than  compensated  for  by  loan  transactions.     The 
Secretary  estimates  that  for  a  sixty-day  period,  when  grain 
IS  cmuig  ,n.  from  two  to  four  millions  will  be  lent  by  the 
banks  daily  on  amvhtg  grain.    How  great  the  loan  trans- 
actions on  subsequent  sales  will  be  w(.  can  onlv  conjecture 
While  able  to  find,  then,  important  cases  of  trade  and 


THK   REDISCOVERY  OF  A    BtRIED  CITY 


381 


speculation  which  dispense  with  the  use  of  checks,  I  cannot 
find  anything  of  magnitude  sufficient  to  aid  Professor  Fish- 
er's case,  and  I  find,  on  the  other  hand,  enormous  over- 
counting in  every  field  where  business  and  banks  meet, 
as  well  as  in  the  relations  of  banks  to  non-commercial  de- 
positors. 

I  conclude,  therefore,  with  reference  to  the  figures  of 
Fisher  and  Kemmcrer '  for  volume  of  trade,  that  they  are 
much  exaggerated  for  the  base  year,  and  that  for  every 
other  year  they  are  wholly  wrong,  both  because  of  their 
excessive  magnitude,  and  because  the  index  of  variation 
has  been  wrongly  chosen. 

^  The  discussion  of  P,  the  price-level,  in  the  statistics  of 
Kemmercr  and  Fisher  need  not  be  extended.  P,  for  the 
equation  of  exchange,  and  for  the  quantity  theory,  is  a 
weighted  average,  each  price  that  goes  into  it  being  weighted 
by  the  number  of  exchanges  involving  the  commodity  of 
which  it  is  the  price.  The  weighting  of  P  should  correspond 
to  the  elements  in  T,  the  volume  of  trade,  and  should  vary 
from  year  to  year,  as  the  elements  in  T  change.^  Now 
Kemmerer's  P  is  weighted  as  follows:  wages,  3,  security 
prices,  8,  wholesale  prices.  89.'  If  our  conclusions  with 
reference  to  the  composition  of  the  volume  of  trade,  as  de- 
veloped in  the  chapter  on  "Volume  of  Money  and  Volume 
of  Trade,"  are  valid,  this  weighting  gives  us  a  P  which  has 
no  relevance  to  the  equation  of  exchange.  The  wholesale 
items  should  have  a  weight  of  not  more  than  one-sixth  of 
the  total  for  1909.     Certain  commodities,  as  wheat  and 

'  Kemmerer's  main  fiRures  are  merely  indicia  of  variation,  rather  than 
absolute  maKnitudes,  for  trade.  On  p.  ly,,  d.  (he.  at.),  however,  he  in- 
dicates that  his  figures  for  "total  monetary  and  check  circulation"  is  also  a 
tiKure  for  "total  business  transactions  "—and  counts  8g%  of  it  as  whole- 
s;i!e  trade. 

-Cf.  the  discussion  of  the  relation  of  1'  and  T  in  the  chapter  on  "The 
Equation  of  Kxchange." 
'  op.  cil.,  p.  136. 


38^ 


THF,   VALUE   OF  MONEY 


cotton,  in  which  there  is  heavy  speculation,  should  be  given 
great  weight,  and  ^M?curities  should  have,  probably,  the 
greatest  weight  of  all.  If "  trade  "  is  to  be  extended  to  cover 
transactions  in  bills  of  exchange  and  loan  transactions  (as 
it  is  by  Kemmerer).'  then  P  should  contain  these  things, 
weighted  more  than  all  else  put  together,  particularly  if 
call  loans  are  included.  The  weights  shoult.  oe  radically 
altered  from  year  to  year.  We  should  then  get  a  P  which 
would  fit  the  "equation  of  e.xchangc"— though  what  else 
it  would  be  good  for  is  hard  to  say!  The  same  criticism 
applies  to  Fisher's  P.  It  is  dominated  by  wholesale  prices.* 
It  therefore  has  no  relevance  to  an  equation  of  exchange 
in  which  only  one-sixth  at  the  very  most  of  the  items  are 
wholesale  items.  Neither  Fisher  nor  Kemmerer  alter  their 
weights  in  P  at  all,  to  correspond  to  yearly  alterations  in 
the  composition  of  T. 

As  indicia  of  changes  in  the  absolute  value  of  money, 
Kemmerer 's  and  Fisher's  index  numbers,  or  other  index 
numbers  of  numerous  wholesale  prices,  with  a  substantial 
weighting  of  wages,  are  probably  better  than  an  index 
dominated  by  stocks.  Stocks  fluctuate  more  widely  than 
wholesale  prices  and  wages,  their  values  are  more  affected 
by  variations  in  business  confidence,  and  by  variations  in 
the  rate  of  interest  For  measuring  the  value  of  money, 
the  index  numbers  here  criticised  are  very  good.  But  fur 
the  purpose  for  which  they  are  chosen,  namely,  to  fill  the 
equation  of  exchange,  and  to  measure  variations  in  a  price- 
level  of  the  sort  the  quantity  theor>'  and  the  equation  of 
exchange  are  concerned  with,  they  are  simply  irrelevant. 
If  it  were  really  true  that  such  an  index  number  varied 
with  the  quantity  of  money,  then  the  quantity  theory  would 
be  effectively  disproved ! 

Now,  in  general  summary  of  our  criticisms  of  the  figures 

'  Ibid.,  pp.  70-71.  2  loc.  cil.,  p.  487. 


THE   REDISCOVERY  OF  A   BURIED  CITY 


383 


of  Kemmerer  and  Fisher:  they  have  systematically  buried 
New  York  City,  and  systematically  covered  up  sjjcculation. 
All  the  errors  converge  in  this  direction.  The  indicia  of 
trade  cover  up  speculation  and  the  other  things  that  go  on 
in  Xew  York,  and  other  financial  centers.  The  indicia 
of  prices  do  likewise.  Fisher  weights  New  York  clearings 
only  I,  while  weighting  country  clearings  5,  in  his  index 
of  variation  of  check  transactions.  He  also  counts  New 
York  returns  for  March  i6,  1909,  as  complete,  and  gives 
all  of  his  estimate  for  non-rrporting  banks  to  the  country. 
Kemmerer  does  not  do  this,  but  he  does  exaggerat:^  the  im- 
portance of  money,  as  compared  with  checks,  and  does  not 
allow  the  velocity  of  money  to  vary  at  all  in  his  figures, 
thus  getting  a  much  greater  constancy  in  the  figure  for  total 
circulation  of  money  and  checks  than  is  proper,  and  cover- 
ing up  the  flexibility  and  variability  which  New  York  gives 
to  our  system.'  In  general,  our  task  in  this  chapter  has 
been  an  archaeological  excavation — we  have  rediscovered 
a  buried  city. 

'  Kemmerer  docs  not  accept  Kinley's  estimate  of  75%  for  checks  as  com- 
pared with  money  in  payments  as  a  "sure  minimum"  for  i8gO,  but  rather 
counts  it  as  a  "fair  maximum."  {Lor.  rit.,  p.  106.)  Using  this  as  a  basis, 
he  gets  a  monetary  circulation  for  i8g6  of  47.7  billions,  and  a  "velocity  of 
money"  (since  the  mimetary  stock  in  circulation  in  iSg6  was  a  little  over 
I  billion)  of  47.  (Loc.  cit.,  p.  114.)  Kinley's  fuller  investigation  in  iQog  has 
made  it  clear  that  his  i8g6  conclusions  understated,  rather  than  overstated, 
th'.  pro|)oitK«i  of  checks  to  money.  His  "sure  minimum"  was  needlessly 
iuw.  He  concludes  in  igog  that  80  to  85%  for  checks  is  safe.  {Op. 
cit.,  p.  201.)  Cf.  Fisher's  comments,  loc.  cit.,  pp.  430;  460  et  seq.  Fisher's  V 
is  about  half  as  great  as  Kemmerer's,  and  varies  to  some  extent.  I  think 
Fisher,  since  his  results  are  closer  to  Kinley's  later  figures,  has  made  much 
the  better  estimate  here. 


W" 


i 


■  *kfr. 


PART  III.    THE  VALUE  OF  MONEY 


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CHAPTER  XX 
RECAPITULATION  OF  POSITIVE  DOCTRINE 

The  chapters  which  have  gone  before  have  been,  in  con- 
siderable degree,  concerned  with  the  analysis  of  unsuccess- 
ful efforts  to  solve  the  problem  of  the  value  of  money,  as 
the  quantity  theory,  or  the  attempts  to  apply  the  notions 
of  supply  and  demand,  marginal  utility,  and  cost  of  pro- 
duction, to  the  problem.  Not  all  that  has  gone  before  has 
been,  even  in  form,  primarily  critical.  The  chapter  on 
"Economic  Value"  lays  the  foundation  for  the  main  con- 
structive theory  of  the  book,  and  in  virtually  every  chapter 
some  portion  of  our  positive  doctrine  has  been  developed. 
In  the  doctrines  criticised,  elements  of  truth  have  been 
noted,  and  in  showing  the  errors  of  the  doctrines  considered, 
constructive  doctrine  has  been  presented  by  way  of  con- 
trast. The  theories  criticised,  moreover,  even  where  they 
have  gone  astray  in  solving  problems,  have  at  least  the 
merit  of  slating  problems,  and  .= .  have  aided  in  clearing  the 
way  for  theories  better  based. 

It  is  the  task  of  the  present  chapter  to  present,  in  a  series 
of  theses,  the  main  constructive  results  so  far  attained.  No 
effort  will  be  made  to  follow  the  order  of  the  exposition  which 
has  preceded.  A  summary  of  that  will  be  found  in  the  de- 
tailed analytical  table  of  contents.  Rather,  we  shall  seek 
to  draw  from  what  has  preceded  the  positive  doctrine  which 
is  scattered  through  the  preceding  chapters,  and  to  present 
it  by  itself,  as  a  basis  for  the  more  systematic  formulation 
of  constructive  theory  which  the  following  chapters  are  to 
contain. 

387 


,<•..> 


riir.    VALIF.   OF  MONEY 


1 .  The  theory  of  the  value  of  money  is  a  special  case  of 
the  j^eneral  theory  of  \alue. 

2.  \'alue  is  a  phenomenon  of  psychological  nature.  Not 
physical  quantities,  hut  psychological  significances,  are 
relevant  when  the  probi'  )f  value  and  price  causation  is 
involved. 

3.  Value  is  not  a  ratio  of  exchange,  or  "purchasing 
power,"  but  is  an  absolute  quantity,  prior  to  exchange. 
It  is  the  fundamental  and  essential  attribute  or  quality  of 
wealth,  the  common  or  homogeneous  element  present  amidst 
the  diversities  of  the  phy.sical  forms  of  wealth,  by  virtue 
of  which  comparisons  may  be  instituted  among  ditTerent 
kinds  of  wealth,  and  different  items  of  wealth  may  be 
added  to  make  a  sum,  put  into  ratios  of  exchange,  and 
so  on. 

4.  Economic  value  is  a  species  of  the  genus,  social  value, 
coordinate  with  legal  value,  and  moral  value.  It  is  part 
of  a  s>  stem  of  social  motivation  and  control. '  Psychological 
in  character,  it  none  the  less  presents  itself  to  an  individual 
as  an  objective,  external  force,  to  which  he  must  adai)t 
himself. 

5.  Individual  prices  have  two  cooperating  causes:  (a)  the 
social  economic  value  of  the  money-unit,  and  (b)  the  social 
economic  value  of  the  unit  of  the  good  in  question. 

6.  The  average  of  prices,  or  the  "price-level,"  is  a  mere 
mathematical  summary  of  the  particular  prices.  The  causa- 
tion involved  in  the  average  of  prices  is  nothing  more  than 
the  causation  involved  in  the  particular  prices. 

7.  The  value  of  money  is  to  be  distinguished  from  the 
"reciprocal  of  the  price-level,"  or  the  "purchasing  power 
of  money."    The  value  of  money  is  an  absolute  quantity, 

'  Since  I  ha\c  already  comiiressed  the  contents  of  a  book  of  200  pages 
into  Chapter  I  of  the  present  book,  it  seems  undesirable  to  attempt  here  a 
further  compression  ot  that  chapter.  I'hese  theses,  therefore,  do  not  give 
the  substance  of  the  social  value  theorv. 


*Wl 


RECAPITULATION   OF   POSITIVE   DOCTRI>fE 


389 


one  of  the  factors  determining  each  particular  price.  Par- 
ticular prices  and  general  prices  may  change  because  of 
changes  in  the  values  of  goods,  with  no  change  in  the  value 
of  money.  Or,  particular  prices  and  general  prices  may 
change  because  of  changes  in  the  value  of  money,  with 
goods  remaining  constant  in  value. 

8.  The  absolute  value  of  money,  assumed  constant,  is 
presupposed  by  the  great  body  of  present  day  price  theory, 
as  supply  and  demand,  cost  of  production,  and  the  capitali- 
zation theory.  These  theories  are,  therefore,  inapplicable 
to  the  problem  >f  the  value  of  money. 

9.  But  supply,  and  demand,  cost  of  production,  the  capi- 
talization theory,  and  other  laws  concerned  with  the  con- 
catenation and  interrelations  of  prices,  being  applicable  to 
the  problem  of  particular  prices,  are  also  applicable  to  the 
problem  of  general  prices.  (Chapter  on  "The  Passive- 
ness  of  Prices.") 

10.  The  general  price-level,  as  a  consequence  of  changes 
in  particular  prices,  growing  out  of  changes  in  the  values 
of  goods,  may  rise  or  fall,  without  antecedent  changes  in  the 
value  of  money,  or  the  quantity  of  money,  or  the  volume  of 
credit,  or  the  volume  of  trade,  or  in  the  "velocities  of  cir- 
culation" of  money  or  credit.  (Chapter  on  "The  Passive- 
ness  of  Prices.") 

1 1 .  The  general  laws  of  prices,  supply  and  demand,  cost 
of  production,  the  capitalization  doctrine,  the  imputation 
doctrine,  etc.,  conflict  with  the  quantity  theory.  In  the 
cases  where  they  conflict,  the  first  named  doctrines  are 
correct,  and  the  quantity  theory  is  wrong.  (Chapter  on 
"The  Pdssiveness  of  Prices.") 

12.  The  value  of  money,  being  a  special  case  of  economic 
value,  is  subject  to  the  same  general  laws.  This  means, 
from  the  standpoint  of  my  theory,  that  the  theory  of  social 
value  is  applicable  to  the  problem  of  the  value  of  money. 


••  u 


I 

•i , 


390 


THE   VALUK   OF   MONEY 


13.  This  is  not  the  same  as  saying  that  the  whole  value 
of  money  is  to  be  explained  by  the  social  value  of  gold 
bullion,  conceived  of  as  a  mere  commodity,  A  h}pothedcal 
case  was  constructed  in  the  chapter  on  "Dodo-Bones," 
in  which  gold  is  the  standard  of  value,  but  is  not  employed 
as  a  medium  of  exchange  or  in  reserves,  where  the  whole 
value  of  money  is  to  be  explained  by  the  value  of  gold 
bullion,  conceived  of  as  a  commodity. 

14-  But,  in  general,  money  gets  part  of  its  value  from  its 
monetary  emplo\Tnents.    (Chapter  on  "Dodo-Bones.") 

15.  The  additional  value  which  comes  to  gold  bullion 
as  a  consequence  of  its  emplo>'ment  as  money,  is  itself  to  be 
explained  on  social  value  principles.  It  grows  out  of  the 
social  value  of  the  services  which  money  performs. 

16.  The  functions  of  money  remain  to  be  examined  in 
detail.  And  the  relation  between  the  value  of  particular 
services  of  money  and  the  capital  value  of  money,  has  not 
yet  been  analyzed.  There  is  a  relation  between  the  two— 
a  relation  which  varies  under  ditlerent  conditions— even 
though  it  has  been  shown  in  the  chapter  on  the  "Capitali- 
zation Theor>'"  that  the  relation  is  not  the  simple  one 
which  holds  between  the  values  of  services  and  the  capital 
value  of  ordinary  income-bearers.  There  must  be  an  incre- 
ment to  the  value  of  gold  bullion  as  a  consequence  of  its 
being  coined,  however,  since  otherwise  there  would  be  no 
force  leading  it  to  be  coined. 

17-  This  increment  in  value  to  bullion,  as  a  consequence 
of  coinage,  becomes  evident  when  free  coinage  is  suspended. 
An  agio  of  coin  over  uncoined  bullion  may  easily  appear. 

18.  But  this  is  not  to  assert  the  doctrine  of  the  quantity 
theory.    Because 

19-  The  money  service  presupposes  the  existence  of 
value  for  money  from  some  source  other  than  the  mone- 
tary employment  (chapter  on  "Dodo-Bones");  and 


RECAPITULATION   OF    POSITIVE   DOCTRINE 


301 


20.  Hence  the  monetary  employment  can  explain  only  a 
differential  portion  of  the  value  of  money. 

21.  The  proposition  that  money  must  have  value  from 
some  source  other  than  the  monetary  employment  does  not 
mean,  necessarily,  that  money  must  be  made  of  precious 
metals,  or  be  convertible  into  precious  metals.  The  value 
of  money  is,  indeed,  most  stable  and  best  sustained  when 
such  is  the  case.  But  it  is  possible  for  money  made  of  paper 
to  have  value  apart  from  the  prospect  of  redemption— 
though  no  clear  case  has  been  made,  in  the  writer's  opinion, 
for  the  view  that  this  has  historically  occurred.  But  as 
a  hypothetical  possibility,  my  theory  holds  that  paper 
money  may  attain  a  value  of  its  own,  growing  out  of  vari- 
ous factors  which  a  social  psychology  can  explain,  including 
law,  patriotism,  and  custom.  Social  values  in  every  sphere 
are  imperfectly  rationalized.  Values  which  in  their  origin 
are  secondary  and  derived  may  become  substantial  and 
independent  of  their  "presuppositions."  This  is  true  of 
legal  and  moral  values.  It  is  true  of  the  capital  value  of 
land.  It  may  be  true  of  paper  money.  This  matter  has 
been  discussed  in  the  chapters  on  "Economic  Value"  and 
on  "Dodo-Bones."  The  social  value  theory  has  not  the 
limitations  of  the  utility  theory  in  dealing  with  such  cases, 
nor  is  it  tied  to  a  metallist  or  bullionist  interpretation. 
Legal,  moral,  and  patriotic  factors,  and  the  influence  of 
social  custom,  all  fall  readily  into  the  social  value  doctrine. 

22.  The  "measure  of  values"  function,  and  the  "standard 
of  deferred  pa>'ments"  function,  need  not  require  the  actual 
use  oi'  money,  and  need  not  add  to  the  value  of  money. 
The  function  of  "medium  of  exchange,"  and  other  functions 
to  be  analyzed  in  a  later  chapter  on  that  topic,  do  involve 
the  actual  emplojTnent  of  money,  and  are  sources  of  value 
for  money. 

23.  The  quantity  of  money  and  credit  are  matters  of 


.^02 


TIIK    VAI.ri;    (,K    MONKY 


m 

1 

Mi 

high  importance  in  economic  h'fe.  They  alTect  vitally  the 
smooth  functioning  of  jjroduction  and  exchange.  While 
not  accepting  the  extreme  view  of  those  writers  who  see 
in  scarcity  or  abundance  of  money  the  primary  cause  of 
the  ebb  and  flow  of  civilization,  I  maintain  that'  the  quan- 
tity of  money  and  credit  does  make  a  vast  difTerencc.  and 
that  the  quantity  theory  contention  that,  after  a  transition 
is  effected,  the  only  consequence  of  a  chi;  ige  in  the  quantity 
of  money  is  a  proportional  change  in  the  price- level,  is 
wholly  indefensible.  (Chapter  on  "Volume  of  Money 
and  Volume  of  Trade.") 

24.  Very  much  of  economic  theory  has  been  developed 
in  abstraction  from  money.  For  economic  statics,  with  its 
delicate  marginal  adjustments,  on  the  assumption  that 
friction  is  banished,  that  the  market  is  fluid,  that  labor 
and  capital  and  goods  are  mobile,  etc.,  money  does  appear 
a  needless  complication.  But  the  static  assumptions  are 
only  possible  because  money  and  credit  have  smoothed  the 
way.  It  is  the  business,  the  function,  of  money  and  credit 
to  overcome  "friction,"  to  effect  "transitions,"  to  make  it 
possible  for  "normal"  tendencies  to  manifest  themselves. 
(Chapter  on  "Volume  of  Money  and  Volume  of  Trade.") 

25.  The  main  work  of  money  and  credit  is  in  effecting 
"transitions,"  bringing  about  readjustments,  enabling 
society,  with  little  shock,  to  adapt  itself  to  dynamic  change. 
The  great  bulk  of  the  actual  exchanging  that  takes  place 
is  speculation,  and  would  not  occur  if  economic  life  were  in 
static  equilibrium.  This  is  true  both  as  a  matter  of  theory 
and  as  a  matter  of  statistics.  :\Iore  than  half  of  the  checks 
deposited  in  the  United  States  are  deposited  in  New  York 
City,  where  "wholesale"  and  "retail"  deposits  are  a  small 
factor.  Bank  clearings  fluctuate  in  close  conformity  with 
stock  exchange  transactions.  Great  banks,  and  the  bulk 
of  banking  transactions,  are  everywhere  found  in  the  specu- 


RKCAPITULATION   OF   POSITIVE    DOCTRINE 


30.^ 


lative  centres.  (Chapters  on  "Volume  of  Money  and 
Volume  of  I'rade,"  and  "The  Rediscovery  of  a  Buried 
City.") 

26.  Hence  a  functional  theory  of  money  must  be  essen- 
tially a  dynamic  theory':  must  rest  in  a  study  of  "friction," 
"transitions,"  and  the  like.    And. 

27.  Hence  a  theory  of  money  like  the  quantity  theory, 
concerntHl  with  "long  run  tendencies"  and  "normal  equi- 
libria" and  "static  adjustments"  touches  the  real  problem 
of  the  value  of  money  not  at  all. 

28.  An  increase  of  money  tends  to  increase  trade.  (Chap- 
ter on  "Volume  of  Money  and  Volume  of  Trade.") 

29.  An  increase  of  credit  tends  to  increase  trade.  (Same 
chapter.) 

30.  An  increase  of  trade  tends  to  increase  the  volume  of 
credit,  and,  where  the  money  supply  is  flexible,  tends  to 
increase  the  money  supply  also.  (Chapter  on  the  "Volume 
of  Trade  and  the  Volume  of  Money  and  Credit.") 

31.  Production  waits  on  trade.  The  problem  of  market- 
ing in  the  modern  world  is  often  more  important  than  the 
problems  of  production  in  the.  narrower  sense.  Selling 
costs  are  probably  greater  than  strict  "costs  of  production." 
"Volume  pf  trade,"  far  from  being  dependent  on  "physical 
capacities  and  technique,"  is  almost  indefinitely  flexible, 
with  changing  tone  of  the  market,  with  changing  values, 
and  with  other  changes,  including  changes  in  the  volume 
of  money  and  credit.  (Chapter  on  "Volume  of  Money 
and  Volume  of  Trade.") 

^2.  The  relation  between  the  volume  of  money  and  the 
volume  of  credit  is  exceedingly  flexible.  The  relation  be- 
tween the  world's  volume  of  credit  and  the  world's  volume 
of  gold  is  likewise  exceedingly  loose,  uncertain,  and  flexible. 
(Chapters  on  "Volume  of  Money  and  Volume  of  Credit," 
and  "The  Quantity  Theory  and  World  Prices.") 


II! 


394 


THE  VALUE  OF  MOXEY 


.^3.  "Veloilty  of  circulation"  is  a  blanket  name  for  a 
complex  and  heterogenous  set  of  activities  of  men.  It  is 
a  passive  resultant  of  many  causes,  and  is  itself  a  cause  of 
nothing.  The  safest  generalization  possible  concerning  it 
is  that  it  varies  with  the  volume  of  trade  and  with  prices. 

34.  Barter  remains  an  important  factor  in  modern  eco- 
nomic life,  and  is  a  flexible  substitute  for  the  use  of  checks 
and  money,  increasing  when  the  money  market  "tightens." 
It  is  greatly  facilitated  by  the  "common  measure  of  values" 
function  of  money. 

35.  The  general  criticism  of  the  mechanistic  scheme  of 
causation  invoked  in  the  quantity  theory  has,  as  its  posi- 
tive corollary,  the  doctrine  that  psychological  explanations 
must  be  given  that  the  phenomena  are  intricate  and  com- 
plex, as  intricate  and  complex  as  the  play  of  human  ideas 
and  emotions,  and  the  network  of  social  relationships. 

36.  This  means  that  the  theory  of  value,  and  of  the  value 
of  money,  as  here  presented,  cannot  assume  the  simple 
form,  or  the  mathematical  precision,  which  have  made  the 
quantity  theory  so  alluring.  It  means,  further,  that  the 
present  study,  as  in  part  pioneer  work,  will  lack  finish  and 
definiteness  in  many  places,  will  contain  errors  and  gaps, 
and  will  leave  many  problems  unsolved,  and  many  distinc- 
tions undrawn.  At  many  points,  the  analysis  is  confessedly 
incomplete,  and  the  problems  imperfectly  thought  through 
— often  inadequately  stated,  if  seen  at  all. 

In  what  follows,  these  theses,  with  doctrines  yet  to  be 
developed,  will  be  woven  together  into  a  systematic  theory 
of  money  and  credit. 

The  study  of  the  functions  of  money,  in  relation  to  its 
value,  will  best  be  approached,  I  think,  through  a  study 
of  the  origin  of  money.  In  this,  I  shall  base  my  conclusions 
chiefly  on  the  work  of  Karl  Menger  and  W.  W.  Carlile, 
who  seem  to  me  to  have  done  most  in  this  field. 


RECAPITULATION  OF   POSITIVE   DOCTRINE 


395 


On  the  basis  of  the  general  theory  of  value  developed  in 
the  first  chapter,  and  the  results  of  the  two  chapters  which 
are  to  follow  on  the  origin  and  functions  of  money,  I  shall 
reach  my  main  conclusions  as  to  the  laws  of  the  value  of 
money.  On  the  basis  of  this  theory  of  value,  and  of  the 
theory  of  the  functions  of  money,  I  shall  also  try  to  de- 
velop psychological  theory  of  credit,  and  to  assimilate 
credit  phenomena  to  the  general  pi  nomena  of  value. 
The  development  which  the  theory  of  credit  has  had,  at  the 
hands  of  men  whose  chief  interest  was  that  of  the  jurist 
or  accountant,  is  valuable  and  important.  I  do  not  wish  to 
discredit  what  has  been  done.  Many  important  doctrines 
concerning  credit  have  beer,  developed.  The  general  theory 
of  elastic  bank-credit,  worked  out  in  the  controversy  be- 
tween the  "Currency"  and  the  "Banking"  Schools,  is  of 
the  highest  importance.  This  theory  I  have  discussed  in 
the  chapter  on  "The  Volume  of  Trade  and  the  Volume 
of  Money  and  Credit."  I  still  feel,  however,  that  there  are 
gaps  in  the  prevailing  ideas  on  credit  which  only  a  social 
psychology  can  fill.  I  shall  undertake  to  construe  credit 
as  a  part  of  the  social  system  of  motivation  and  control, 
and  to  differentiate  it  from  other  parts  of  that  system  by  an 
analysis  of  its  functions.  I  think,  too,  that  the  theory  of 
the  relation  of  credit  and  money  is  in  especially  unsatis- 
factory shape,  particularly  with  reference  to  the  factors 
governing  reserves. 

A  final  chapter,  in  Part  IV,  will  undertake  to  bring 
together  the  various  points  in  our  discussion  which  deal 
with  the  theory  of  prosperity,  and  will  seek  to  bring  the 
notions  of  "theory  of  prosperity  vs.  theory  of  wealth," 
"statics  vs.  dynamics,"  "normal  vs.  transitional  tenden- 
cies," and  certain  other  similar  contrasts,  into  a  higher  syn- 
thesis, which  will,  to  be  sure,  not  rob  these  contrasts  of 
their  significance,  but  will  rather  find  certain  generic  prin- 


.^'/> 


Tin;  VAi.n;  ok  monkv 


ciplc's  which  thi-y  share,  and  so  make  it  possible  to  measure 
considerations  in  one  sphere  in  temis  of  considerations  in 
the  other  sphere.  In  very  larj?e  degree,  students  of  dynam- 
ics and  students  of  statics  have  been  talking  at  cross- 
purjK)ses,  missing  the  force  of  one  another's  arguments,  and 
have  bem  quite  unal)Ie,  even  when  understanding  one 
another,  to  come  to  agreement,  precisely  because  they  have 
lacked  principles  by  means  of  which  they  could  compare 
in  any  quantitative  way  the  forces  which  each  studies. 
A  higher  synthesis,  which  would  give  static  and  dynamic 
theories  common  ground,  would  seem  to  be  a  desideratum 
of  high  importance.  Such  a  synthesis  would  go  far  toward 
unifying  the  science  of  economics.  I  believe  that  the  theory 
of  money  and  credit,  approached  from  the  angle  of  the 
social  value  theory,  will  meet  this  need. 


'1:' 


CHAPTER  XXI 
THE  ORIGIN  OF  MONEY,  AND  THE  VALUE  OF  GOLD 

This  chapter  is  not  concerned  with  history  or  anthro- 
pology for  their  own  sake.  The  present  writer  has  made 
no  independent  historical  or  anthropological  researches,  in 
connection  with  the  question  of  the  origin  of  money.  The 
chapter  is  primarily  concerned  with  giving  an  exposition 
of  the  theories  of  two  writers,  Karl  Menger  and  VV.  W. 
Carlile.'  It  is  not  imiwrtant,  for  my  purposes,  whether 
either  writer  has  presented  a  theory  which  anthropology 
will  accept  as  a  correct  account  of  actual  origins.  The 
theories  do  throw  light  on  present  functioning,  and  seem 
to  me  to  be  correct  as  analytical  theories,  whether  histor- 
ically adequate  or  not.  There  are  two  main  questions  with 
which  the  chapter  is  concerned: 

(i)  How  did  money  come  to  be? 

(2)  Why  should  gold  and  silver  have  passed  all  rival 
commodities  in  the  competition  for  employment  as  money? 

Viewing  these  questions  from  the  standpoint  of  present 
functioning,  rather  than  from  the  standpoint  ol  historical 
origins,  we  may  restate  them  as  follows: 

(i)  Why  should  men  accept  small  disks  of  metal,  or 
paper  representatives  of  these  metal  disks,  for  which,  as 
metal,  they  have  no  use,  or  at  all  events  far  in  excess  of  the 
amount  which  they  can  make  use  of  as  metal,  in  return  for 
economic  commodities  which  they  can  use?  The  social 
utility  of  a  money  economy  may  well  be  granted,  without 
giving  an  answer  to  this  question.     Granting  that  social 

'  Mencer,  "  (ield,"  lland-^'Ortcrbuckdcr Staalmisscnschajtcn;  Carlile,  Evolu- 
tion of  Modirn  Money. 

397 


398 


THE   VALUE   OF  MONEY 


economic  life  works  better  by  far  when  men  do  accept  these 
disks  of  metal  in  payments,  the  question  still  remains  not 
merely  as  to  why  the  practice  started,  but  also  as  to  why 
it  continues.  Granted  that  it  is  to  the  individual,  as  well 
as  to  the  social  advantage,  that  each  individual  should 
accept  these  metal  disks  in  excess  of  his  personal  need 
for  the  metal,  if  he  is  assured  that  he  can  pass  them  on  to 
others  at  will  in  return  for  the  goods  he  wishes  to  consume, 
the  question  still  remains  as  to  why  the  individual  should 
have  this  assurance,  as  to  why  the  general  piactice  should 
continue.  ^Menger  quotes  Sa\'igny  as  holding  that  the 
thing  is  downright  "mysterious,"  and  the  Aristotelian 
answer  of  social  convention  (sometimes  interpreted  as 
"social  contract")  is,  in  efTect,  a  confession  that  the  thing 
does  baffle  explanation  on  the  ordinarily  understood  laws 
of  exchange.  The  convergence  of  individual  and  social 
advantage,  which  English  economic  theory  has  done  so 
much  to  emphasize,  is  less  clear  by  far  in  connection  with 
money  than  with  the  case  where  A  trades  a  sheep  (of  which 
he  has  a  surplus)  to  B  for  a  quantity  of  grain  (of  which  B 
has  a  surplus),  while  A  has  not  enough  grain,  and  B  has  not 
enough  sheep.  This  exchange  is  clearly  to  the  advantage 
of  both  A  and  B,  and  the  practice  of  making  such  exchanges 
is  clearly  to  the  general  advantage.  But  in  the  case  of 
money,  A  trades  sheep  (of  which  he  may  not  have  an  ex- 
cess, so  far  as  his  capacity  to  consume  is  concerned)  for 
disks  of  metal  which  he  probably  does  not  intend  to  con- 
sume at  all.  The  social  advantage  of  a  general  practice  of 
the  sort  is  easily  established,  but  it  is  not  clear  that  it  is 
to  A*s  advantage,  unless  we  assume  the  practice  general. 
But  there  are  many  practices  which  could  be  shown  to  be 
socialh'  advantageous  if  all  men  practiced  them,  and,  in- 
deed, individually  advantageous,  if  generally  practiced, 
which  can,  none  the  less,  not  be  made  a  general  practice. 


THE  ORIGIN  OF  MONEY  AND  THE   VALUE 


viOLD     399 


If  thieves  would  cease  stealing,  we  could  dispense  with  a 
vast  expense  now  incurred  in  police  and  safe  deposit  vaults 
and  heavy  locks,  etc.,  and  with  a  small  fraction  of  the 
savings  could  gi\  e  pensions  to  the  thieves  which  would  sur- 
pass by  far  their  present  incomes!  Individual  and  social 
advantage  would  converge.  But  for  many  reasons  the 
practice  could  not  be  instituted,  and  would  break  down 
quickly  if  instituterl.  Very  powerful  social  pressure  indeed 
is  needed  to  make  au  advantageous  social  institution— like 
morality — work,  so  long  as  individuals  sometimes  find  ad- 
vantage in  breaking  the  jreneral  practice,  even  though  the 
general  practice,  on  the  part  of  other  people,  is  of  advantage 
to  every  individual.  Now  it  is  clear  that  the  institution 
of  money  is  to  the  social  advantage.  It  is  clear  that  it  'j 
to  the  advantage  of  every  individual  who  has  money  that 
everyone  else  should  be  ready  to  accept  it  in  unlimited 
amount,  in  return  for  his  goods  and  services.  But  it  is  not 
clear,  on  the  surface,  why  everyone  should  be  ready  to  take 
metal  disks  in  unlimited  amount  in  return  for  goods  and 
services.  People  will  not  take  coal  or  horses  or  hay  or  land 
or  white  elephants  in  unlimited  amount  in  return  for  goods 
and  services.  Why  should  there  be  such  a  general  practice 
regarding  metal  disks  or  pieces  of  paper? 

This  question,  to  one  who  has  always  lived  in  a  money 
economy,  may  seem  childisl  Such  questions  regarding 
anything  to  which  we  have  grown  accustomed  seem  childish 
to  those  who  have  not  been  use'  to  raising  them.  Why  does 
the  sun  rise?  Why  does  seed-corn  sprout?  But  these  also 
are  proper  scientific  questions,  the  answer  to  which  is  of 
high  practical  importance!  The  a^  wer  to  the  question 
just  raised  regarding  money  will  go  far  toward  explaining 
the  functions  of  money,  and  the  theory  of  the  functions  of 
money,  together  with  the  general  theory  of  social  value, 
will  give  an  answer  to  the  question  as  to  how  the  money 


400 


THE  VALUE  OF  MONEY 


function  adds  to  the  value  of  money.  The  answer  which  I 
shall  give  on  the  lirst  que^^tion  will  in  large  measure  follow 
the  lines  laid  down  by  Menger. 

(2)  The  second  question  needs  little  revision,  when  stated 
from  the  standpoint  of  present  functioning,  rather  than  of 
historical  origin.  We  have  more  recent  history  to  deal  with 
in  connection  with  this  question,  and  Carlile,  in  his  answer, 
offers  substantial  historical  and  anthropological  proofs. 
It  is  still,  however,  present  functioning  that  is  important, 
and  the  question  may  be  restated  thus: 

Why  are  gold  and  silver,  and  particularly  gold,  the  stand- 
ard money  of  the  great  part  of  the  world  to-day?  The 
principles  of  social  psychology'  which  Carlile  employs  in 
explaining  the  historical  development,  are  also  important 
in  explaining:  the  present  attitude  of  mankind  toward  gold 
and  silver,  and  will  serve,  together  with  the  general  theory 
of  social  value,  to  answer  the  question  as  to  the  value  which 
money  receives  from  the  employment  of  the  money  metal 
as  a  commodity. 

It  is  worthy  of  note  that  neither  of  these  questions  has 
been  seriously  raised  or  discussed  by  most  recent  writers 
of  the  quantity  theory  tj-pe.  Professors  Kemmerer  '  and 
Fisher  give  no  attention  to  them  at  all.  Both  assume  money 
as  circulating  as  the  starting  point  of  the  argument,  with- 
out noticing  how  much  is  involved  in  the  assumption. 
Neither,  moreover,  gives  an  analysis  of  the  functions  of 
money.  Considerations  drawn  from  the  question  as  to  the 
origin  and  functions  of  money  are  hard  to  bring  into  the 
quantity  theory  scheme.  If  money  circulates,  there  are 
causes  for  it.  Fully  to  understand  those  causes,  would 
be  to  understand  also  the  terms  on  which  money  circulates, 
that  is  to  say,  the  prices.    But  then  a  quantity  theory  would 

'  Wc  ^lu)ukl  make  a  ^\\^\\i  and  unimportant  qualifiaition  as  to  Kcmmcrcr. 
Cf.  our  cha|>ter  on  "Dcxlo- Bones,"  supra. 


THE  ORIGIN  OF  MONEY  AND  THE  VALUE  OF  GOLD  4OI 


be  superfluous!  And  if  the  quantity  theory  answer  should 
not  be  obviously  in  harmony  with  the  answer  already  given 
by  the  theory  of  origin  and  functions,  then  doubt  would 
be  cast  on  the  quantity  theory  explanation.  The  quantity 
theorists  do  well  to  avoid  mixing  up  with  their  discussion 
considerations  drawn  from  the  general  theory  of  value, 
and  from  the  theory  of  the  origin  and  functions  of  money. 
The  answer  to  the  first  question  rests  primarily  in  the 
fact  that  there  are  differences  in  the  sakability  of  goods. 
Value  and  saleability  are  not  the  same  thing.  A  copper 
cent  has  high  saleability;  a  farm  has  low  saleability.'  Some 
valuable  things  cannot  be  exchanged  at  all.  The  Capitol 
at  Washington  cannot  be  exchanged,  yet  has  value.  Under 
a  communistic  or  socialistic  regime,  exchange,  as  wc  now 
know  it,  would  largely  or  wholly  cease.  An  entailed  estate 
cannot  be  sold,  yet  has  value.  If  society  should  really 
come  to  the  stable  equilibrium  of  the  "static  state,"  most 
of  the  exchanges  of  lands,-  securities,  and  other  long-time 
income-bearers  would  cease,  but  they  would  still  be  valu- 
able.    I  have  developed  these  notions  in  my  article  on 

'  It  seems  necessary  to  point  out  this  essential  lack  of  correlation  between 
value  and  exchangeability,  since  Mr.  Horace  White,  in  his  Money  and  Bank- 
ing (jth  cd.,  p.  135),  identifies  value  and  exchangeability:  "V^alue  is  an 
ideal  thing  in  the  same  sense  that  weight  is.  The  former  means  exchange- 
ability; the  latter  means  force  of  gravity.  \  dollar  is  a  definite  amount  of 
exchangeability."  (."/.  also  .\masa  Walker's  contention  that  "exchangeable 
value "  is  tautology,  equivalent  to  "exchangeable exchangeability ! "  Science 
of  Wealth,  5th  ed.,  p.  g.  Cf.  my  article  "The  Concept  of  Value  Further 
Considered,"  Quart.  Jour,  of  Econ.,  Aug.  IQ15,  PP-  696  ct  seq. 

2  This  is  stated  by  Schumjieter,  so  far  as  land  is  concerned.  Vide  Quarterly 
Journal  of  Economics,  Aug.  1915,  p.  704-  It  >«  due  Menger  to  point  out  that 
he  does  not  make  the  distinction  between  value  and  exchangeability  which  I 
have  just  made.  His  theory  rests  in  an  analysis  of  the  saleability  or  exchange- 
ability of  goods.  But  Mcnger's  conception  of  \  alue  is  essentially  different 
fmm  my  own.  He  commonly  means  by  "  Wert"  merely  subjective  value,  or 
marginal  utility.  He  objects  to  the  notion  that  cine  g<Kxl  measures  the  value 
of  another,  or  that  ginnls,  when  exchanged,  ari'  wiuivalent  in  value,  on  tlie 
ground  that  there  mu*t  be  a  surplus  in  value  (subjective  value)  for  eaiii  ex- 
changer, or  exchange  would  not  take  place.   He  has,  as  a  primar>-  concept ,  no 


402 


THE  VALUE   OF  MONEY 


■  : 


"Value"  in  the  Quarterly  Journal  of  Economics,  Aug.  191 5, 
and  have  referred  to  them  again  in  the  chapter  on  "Value" 
in  the  present  book,  and  so  need  not  expand  the  discussion 
here.  Exchangeability  and  value  are  different  characteris- 
tics of  goods.  Value  is  an  essential  precondition  of  ex- 
changeability, but  can  exist  without  it.  Value  is,  however, 
commonly  increased  by  exchangeability.  But  the  theory 
of  exchangeability  is  a  separate  matter,  and  cannot  be  de- 
duced from  the  theory  of  value  alone. 

Menger  points  out  the  difference  between  "buying 
price"  and  "selling  price."  You  can  buy  a  piano  for  S400. 
If  you  try  the  next  minute  to  sell  it  for  $375  you  will  prob- 
ably fail.  You  may  pay  ten  thousand  dollars  for  a  farm. 
The  income  of  the  farm  may  increase.  The  tax  assessment 
may  increase.  The  capital  value  of  the  farm  may  increase. 
And  yet,  you  may  have  to  wait  for  a  long  time  before  you 
find  a  buyer  who  will  pay  you  ten  thousand  dollars  for  it. 
One  buys  pianos  or  farms,  as  a  rule,  only  when  one  wishes 
to  use  them,  or  when  one  has  such  special  knowledge  of  the 
market  that  one  knows  pretty  definitely  where  purchasers 
can  be  found  for  a  resale,  at  a  profit.  Even  in  such  highly 
organized  markets  as  the  stock  and  produce  exchanges,  one 
cannot  usually  buy  in  quantity  and  sell  immediately  with- 
out .some  loss.  " Buying  price"  and  "selling  price"  of  such 
a  stock  as  Industrial  Alcohol  Preferrtxi  are  sometimes  five 


a'  --olute  social  value.  "  Taiischwrrl "  is  for  him  a  relative  value,  though  he  is 
finally  driven  to  constructing  what  is  virtually  an  absolute  value  notion,  by 
flistinKuishinR  "ditssenr  Taiischurrt"  from  "iiiiicrtr  Tmischwerl"  in  the  case 
of  money,  the  latter  being  concerned  exclusively  with  the  causes  affecting 
prices /row  tlic  xidc  of  money,  ignoring  changes  in  prices  due  to  causes  af- 
fecting goods.  ((/.  art.  " { ield,"  in  Ilaitd-^iirtcrbmh  Jrr  Staalsuissenscliafkn, 
3d  ed.,  i)p.  59^  593-  He  docs  not  make  this  distinction  in  developing  the 
theory  of  sdeability  of  goods,  however.  Cf.  the  chapter,  supra,  on  "Mar- 
ginal Utility  and  the  \'alue  of  Money."  It  is  absolute  social  value  which 
1  am  here  distinguishing  from  exchangeability.  It  is  equally  true,  how- 
.■vcr,  that  subjective  v;..luc  and  exchangeability  have  no  necessary  correla- 
tion. 


THE   ORIGIN   OF  MONEY  AND  THE   VALUE   OF  GOLD     403 


points  apart,  at  a  given  time.  The  forced  sale  of  land  in 
bankruptcies,  or  for  taxes,  notoriously  often  bring  prices 
far  below  the  price  which  would  correctly  express  the  value 
of  the  land.  It  is  only  in  the  ideal  fluid  market  assumed  by 
static  theory,  where  adjustments  are  instantaneous,  where 
causal -temporal  relations  have  become  timeless  logical  re- 
lations, that  values  are  perfectly  expressed  in  prices.' 

All  these  difficulties  were  enormously  greater  in  days  of 
primitive  barter,  before  money  and  organized  markets  had 
been  evolved.  The  difficulties  of  barter  have  been  much 
elaborated  in  the  literature  of  money.  I  shall  recur  to  the 
topic  in  my  chapter  on  the  "Functions  of  Money. "  Part  of 
the  trouble  arises  from  the  "  want  of  coincidence  "  in  barter — 
the  failure  to  find  the  man  who  has  what  you  want,  and  who 
at  the  same  time  wants  what  you  have.  Goods  have  high 
or  low  saleability,  depending,  in  considerable  degree,  on  the 
universality  of  the  desire  fcr  them.  They  may  have  high 
value  if  only  a  few  rich  men  desire  them,  provided  they  be 
scarce.  The  paintings  of  old  masters  would  be  a  case  in 
point.  Incidentally,  the  difference  between  buying  price 
and  selling  price  is  often  enormous  in  this  case,  and  the 
making  of  a  sale  may  well  involve  long  and  expensive 
negotiations.  The  difficulties  of  exchange  here  arise  not 
alone  from  the  limited  market,  however,  but  also  from  the 
fact  that  each  painting  is  a  unique,  and  a  unique  of  high 
value.  A  good  might  have  high  saleability  despite  the 
fact  that  the  ultimate  demand  for  it  comes  from  only  a  few 
rich  men,  if  it  could  be  easily  subdivided  and  standardized. 

Menger  enumerates  a  number  of  circumstances  connected 
with  a  good  which  increase  its  saleability.  Among  them 
are  the  following: 

I.  Widespread  and  intense  desire  for  the  thing  (to  which 

'  Cf.  A.  S.  Johnwin,  "Davenport's  Competitive  Economics,"  Quart.  Jour. 
of  Econ.,  May,  1914,  p.  431. 


I 

■  f 


■I  I 

■  I    ^ 


404 


TlIK   VALUE   OF   MONEY 


should  be  added,  adequate  wealth  on  the  part  of  those  who 
di'siri'it). 

2.  Scarcity  of  the  comnuxlity  in  question. 

^^.  Divisibility  of  the  commodity. 

4.  Considerable  development  of  the  market. 

5.  That  the  demand  for  the  article  should  be  more  than 
local. 

6.  That  it  be  cheaply  transportable. 

7.  That  commerce  between  localities  in  the  article  be 
unrestricted. 

8.  That  demand  for  the  article  be  constant,  not  fluctuat- 
ing, in  time. 

9.  That  the  article  be  durable. 

10.  That  it  be  uniform  in  quality,  so  that  standardiza- 
tion is  easy. 

In  general,  Menger's  list  meets  the  requirements  often 
laid  down  for  a  good  medium  of  exchange.  In  general,  to 
the  extent  that  any  commodity  meets  these  tests,  it  will 
be  saleable.  Commodities  will  vary  indefinitely  in  the  ex- 
tent of  their  saleability. 

Starting  with  the  distinction  between  value  and  sale- 
ability,  and  with  the  analysis  of  the  circumstances  affecting 
saleability,  we  may  now  undertake  to  see  how  money  tends 
to  develop  out  of  a  barter  economy.  Suppose  that  a  man, 
in  a  barter  economy,  has  a  good  of  low  saleability,  which 
he  wishes  to  trade  for  some  other  specified  commodity. 
He  finds  no  one  who  possesses  the  commodity  he  wants  who 
is  willing  to  trade  with  him.  But  if  he  can  trade  his  article 
of  low  saleability  for  some  other  commodity  of  higher 
saleability,  still  not  the  thing  he  wants,  he  has  yet  made 
progress,  he  has  got  one  step  nearer  the  object  which  he 
does  want.  It  will  be  possible  now,  perhaps,  to  trade  the 
new  article,  of  higher  saleability,  for  the  commodity  he 
wants.    If  not,  he  can  trade  it  for  some  article  of  still  higher 


is*  \ 


THE  ORIGIN  OF  MONEY  AND  THE   VALUE  OF  GOLD     405 


saleability,  which  he  can  finally  trade  for  the  article  he 
wants.  By  several  indirect  exchanges,  he  finally  reaches 
his  object.  Incidentally,  it  is  erroneous  to  distinguish 
money  and  barter  economies  as  economies  based  on  direct 
and  indirect  exchange.  The  barter  economy  may  well  in- 
volve much  more  indirection  than  the  money  economy,  in 
many  cases. 

If  there  be  in  the  market  some  one  commodity  which  has 
a  conspicuously  higher  degree  of  saleability  than  any  other, 
the  more  sagacious  men  in  the  market  will  make  it  a  point 
to  get  hold  of  it  and  accumulate  it  in  excess  of  their  antic- 
ipated consumption  of  it.  They  will  do  this,  because  they 
will  see  that  they  can  thereby  get  other  things  which  they 
do  need  more  easily  than  in  other  ways.  With  the  accumu- 
lation of  a  given  kind  of  highly  saleable  goods,  in  excess, 
by  a  few  men  in  the  group,  in  the  expectation  that  the  sur- 
plus will  subsequently  be  used  to  buy  other  goods, — as  yet 
perhaps  not  specifically  determined — we  have,  not  money, 
but  a  big  step  toward  money.  At  first  only  a  few  grasp  the 
great  idea.  They  succeed  and  become  wealthy.  Then  others 
see  the  advantage  of  the  thing,  and  imitate  them.  The 
prestige  of  the  wealthy  and  successful  men  would  induce 
imitation  even  if  the  advantage  were  not  clearly  seen. 
Then  a  tradition  and  a  custom  grows  up.  With  the  growth 
of  tradition  and  custom,  picking  out  one  or  a  small  number 
of  things  as  particularly  desirable  objects  to  accumulate 
because  of  their  saleability,  with  the  practice  of  ac- 
cumulating these  articles  in  excess  of  intended  consump- 
tion, money  becomes  an  accomplished  fact.  There  is 
no  need  for  agreement  or  legislation.  Money  is  not,  in 
its  origin,  certainly,  a  matter  of  law  or  conscious  public 
planning. 

With  the  development  of  a  highly  saleable  article  into 
money,  moreover,  we  have  further  a  great  increase  in  that 


4o6 


THE  VALXJE  OF  MONEY 


saleability  itself.  The  quality  which  made  the  practice 
possible  becomes  greatly  enhanced  by  the  practice.  Menger 
thinks  that  this  leads  to  an  absolute  difference  between 
money  and  goods,  the  money  article,  which  formerly  was 
merely  superior  to  other  goods  in  saleability,  now  becomes 
absolutely  saleable.  The  absoluteness  of  this  distinction, 
which  would  make  it  a  distinction  in  kind,  rather  than  in 
degree,  seems  to  me  not  to  be  sound.  I  think  that  the  dis- 
tinction remains  a  distinction  of  degree.  For  one  thing, 
the  development  of  money,  while  it  adds  to  the  saleability 
of  the  money-commodity,  also  adds  to  the  saleability  of  other 
goods.  Two  things  must  be  exchanged,  in  order  that  one 
may  be!  It  is  the  business  of  money  to  facilitate  exchange, 
to  overcome  the  difficulties  of  barter,  to  bring  about  the 
fluid  market.  And  it  does  this  not  merely  by  acting  as  a 
medium  of  exchange.  The  fact  that  goods  can  be  priced 
in  terms  of  money,  can  have  a  common  measure  of  value, 
makes  barter  itself  easier,  as  I  have  shown  in  my  chapter  on 
"  Barter  "  in  Part  II.  There  are  many  articles  in  trade  at  the 
present  time  whose  saleability  is  not  much  less  than  that  of 
money,  in  ordinary  times.  Wheat  in  the  grain  pit  is  surely 
highly  saleable.  Stocks  and  bonds  are.  If  it  be  objected 
that  in  the  wheat  market  there  is  always  some  difference 
between  buying  price  and  selling  price,  if  considerable 
quantities  are  involved,  it  may  be  answered  that  the  same 
is  true  in  the  "money  market."  The  man  who  has  just 
negotiated  a  three  months'  loan  of  five  hundred  thousand 
dollars  at  3>^  %  may  well  have  trouble  in  turning  that 
loan  over  to  someone  else  immediately  without  shaving 
%^7o  froi"  the  money-rate!  Besides,  it  is  not  true  that 
values  remain  unchanged  when  a  big  buyer  shifts  from 
the  bull  to  the  bear  side  of  the  market.  Buying  price  is 
higher  than  selling  price  in  that  case  partly  because  his 
economic  power  has  ceased  to  sustain  the  value  of  the 


THE   ORIGIN  OF  MONEY  AND  THE   VALUE  OF  GOLD     407 


wheat,  and  the  price  would  not  correctly  express  the  value 
if  it  remained  uninfluenced  by  that  fact. 

Further,  as  we  shall  see  when  we  come  to  the  analysis  of 
credit,  one  chief  function  of  modern  credit  is  to  increase  the 
saleability  of  goods,  and  to  enable  men  to  use  the  value  of 
their  goods  in  effecting  exchanges  without  actually  alienat- 
ing their  property  in  the  goods.  It  seems  to  me  that  the 
drift  of  modern  systems  of  exchange  is  toward  closing  up 
the  gap  between  money  and  goods,  in  respect  of  saleability, 
rather  than  to  widen  it.*  But  this  is  to  anticipate  later  dis- 
cussion. 

It  is  not  necessary,  in  answering  our  second  question, 
as  to  the  reasons  why  gold  and  silver  have  become  the  stand- 
ard money  of  the  world,  to  go  far  in  the  study  of  primitive 
moneys.  Wheat  has  almost  never  been  money.  The  value 
of  wheat  sinks  rapidly  with  increase  in  supply,  and  is  very 
unstable.  Wheat  meets  some  other  tests  that  fit  it  for 
money,  as  easy  divisibility,  ease  in  standardization,  and 
even  has  some  degree  of  durability,  though  subject  to  de- 
terioration and  waste  with  keeping,  and  involving  expense 
in  keeping.  Carlile  and  Ridgeway  think  that  wheat  was 
used  to  some  extent  among  the  Greeks  in  Southern  Italy 
as  money,  at  one  time.^  But  this  was  possible  because  there 
was  a  regular  export  trade  in  wheat — the  same  thing  that 
made  tobacco  available  as  money  in  V'irginia.  In  general, 
however,  commodities  which  minister  to  easily  satiable 
wants  are  ill-adapted  for  money.  And  that  is  especially 
true  of  current  stocks  of  goods  currently  consumed. 

'The  man  who  wishes  to  "break"  a  twenty  dollar  bill  may  well  have 
to  go  through  Menger's  process,  getting  two  tens  from  one  man,  breaking 
one  of  these  into  two  lives  with  another,  and  so  on.  Or  he  may  have  to  buy 
something  which  he  does  not  want  to  get  "change." 

*  Ridgeway,  Origin  of  Metallic  Currency,  p.  327;  Carlile,  Evolution  of 
Modern  Money,  p.  233.  (irain  is  said  to  have  t)een  used  in  ancient  Cliina 
as  money, — not  as  a  standard  of  value,  but  as  a  medium  of  exchange.  Chen 
Huan  Chang,  Economic  Principles  of  Confucius  and  his  Scliool,  vol.  II,  p.  437. 


4o8 


TIIK   VALUE   OF   MONKY 


The  iiccumulation  of  money,  moreover,  implies  a  stage  of 
human  development  where  the  accumuhition  of  capital  is  pos- 
sible. It  implies  foresight,  the  suppression  of  present  wants 
in  the  interest  of  future  wants,  and  almost  always  money  has 
been  a  commodity  well  .suited  to  serve  as  provision  against 
future  contingencies.  Cattle,  slaves,  knives,  fish-hooks, 
cooking  implements,  and  similar  things  have  been  money. 
The  "store  of  value"  function  manifests  itself  early. 

But  very  early  a  different  sort  of  commodity  comes  in. 
Articles  of  ormtncnl  early  begin  to  take  the  place  of  articles 
that  minister  to  more  animal  wants.  It  seems  strange  that 
articles  meeting  wants  which  are  commonly  counted  frivo- 
lous and  fanciful  should  distance  those  obviously  necessary 
in  the  race  for  a  place  as  money.  It  seems  strange  that  the 
nations  now  at  war  should  seem  more  concemefl  about  their 
gold  supplies  than  about  their  wheat  supplies.'  But  it  is 
none  the  less  a  fact  that  men  in  all  ages  have  been  enor- 
mously concerned  about  ornament.  In  warm  regions,  orna- 
ment has  commonly  preceded  clothing.  Ver>'  early,  neck- 
laces, bracelets,  rings,  earrings,  nose-pendants,  etc.,  became 
objects  of  exceedingly  great  desire.  And  very  early,  gold 
and  silver  were  used  for  such  purposes,  and  men  made  long 
expeditions  for  them  and  fought  wars  for  them  in  very 
early  times,  before  the  money  economy  was  developed  far. 
Other  ornaments  than  those  made  of  gold  and  silver  have 
al.so  become  money.  Wampum,  polished  shells,  iron  orna- 
ments, etc..  have  all  been  money.  The  Karoks  of  California 
were  accustomed  to  use  strings  of  shell  ornaments  as  money. 
When  this  was  supplanted  by  American  silver,  they  used 
strings  of  silver  coins  as  ornaments,  dressing  their  women 
lavishly  with  rows  of  silver  dimes,  quarters,  and  half- 
flollars!  Ornament  and  money  are  freely  /;;/rrchangeable 
in  primitive  life.   To-day,  in  the  Western  world,  the  thing  is 

'  Written  in  1914. 


THE  ORIGIN  OF  MONEY  AND  THE  VALUE  OF  GOLD  409 


more  specialized  ami  differentiated,  and  the  interchange  of 
money  and  ornament  is  largely  confined  to  jewelers,  bankers, 
especially  international  bankers,  gold  brokers,  and  the 
mints,  through  whom  the  rest  of  society  make  the  inter- 
change. In  India,  ht)wever,  the  peasant's  hoard  takes  the 
form  of  bracelets,  bangles,  and  earrings  for  his  wife  and 
daughters,  and  the  peasant  himself  seems  to  regard  them  in 
the  double  light  of  provision  for  future  needs,  and  as  con- 
ferring social  distinction.  They  are  both  ornament  and 
savings  bank,  and  are  superior  to  a  savings  bank  from  the 
standpoint  of  effective  saving,  since  the  natives  would  spend 
what  they  put  in  the  bank,  but  only  famine  can  make  them 
dispose  of  the  ornaments  of  their  women.'  Saving  is  a 
practice  not  easily  started.  There  are  powerful  motives  in 
human  life  making  for  prodigality.  Social  prestige  comes  to 
the  man  whose  hospitality  is  lavish.  Social  expectation, 
which  is  the  most  powerful  steady  motive  power  in  human 
life,  makes  powerfully  for  prodigality.  Thrift  is  a  virtue 
little  esteemed  among  primitive  men,  and  none  too  highly 
esteemed  among  the  masses  in  most  countries.  The  grudg- 
ing person,  the  tightwad,  the  man  who  fails  to  do  his  share 
of  the  treating,  the  w^oman  who  entertains  her  guests  with 
inadequate  fare — none  of  these  enjoy  high  social  esteem. 
To  offset  this,  a  motive  equally  powerful  must  manifest 
itself.  It  would  be  considered  mean  and  contemptible  for 
the  Hindu  to  put  money  away  instead  of  spending  it  on 
feasts  at  marriages  and  funerals,  and  in  hospitality  on  other 
festive  occasions.  But  lie  gains,  instead  of  losing,  in  social 
esteem  and  prestige,  if  he  decorates  his  women  with  gold 
and  silver.    Later,  the  advantage  of  such  a  practice  as  a 

'  The  Hindu  law  of  inheritance  is  a  factor  here.  The  Hindu  woman  may 
retain,  after  the  death  of  her  husband,  father  or  brother,  the  ornaments 
he  has  given  her  during  his  lifetime.  But  all  of  ihe  rest  of  the  family  p.'op- 
erty  must  go  to  male  heirs,  even  remote  male  heirs  coming  in  before  the 
closest  female  relatives. 


!  f 


410 


THE    VUXT:  Of   MONE\ 


matter  of  provision  again>i  luturc  wants  would  gU  into 
men's  minds,  and  woul.!  become  %n  addi-d  intinlive  to 
maintain  and  in(rea.-«e  th,-  pntitke.  Thus  the  frivolou> 
and  fane  iful  side  of  men  >  nature  furnishes  a  powerful  lever 
for  the  development  <»i  b«»Lh  moni\-  and  capital.  In  the 
store  of  value  fum  tlon  we  fm*l  one  ol  thf  carlie-i  md  most 
significant  functions  oi  m<..K-y.  Carlilo  offers  a  wealth  of 
evident e  iu  >how  thiy  intenhangealjility  of  moiey  and  or- 
nament among  man}  !Hoi)les,  at  dillerent  ^u^-s  of  culture. 

Three  powerful  elements  of  human  nature  v/ork  together 
in  sustaining  the  value  of  the  metals  wliich  become  widely 
used  as  ornament: 

(1)  love  of  ipprobation 

(2)  the  -.ex  impulse; 

(3)  the  spirit  of  rivalry  -ar  competition. 

In  these  thrc*.-  we  have,  pernaps.  the  lirmest  basis  which  it 
is  possible  to  construct  lor  the  value  of  anything!     When 
religion  is  added,  a^  has  often  been  the  case  with  tlie  precious 
metals,   the  basis  becomes  solid  indeed !     Modern  social 
psycholog>-  has  increasingly  made  clear  the  power  of  the 
first.    Social  expectation  can  take  the  raw  stuff  of  human 
nature,  and  mold  it  into  almost  any  form  it  pleases.    Orig- 
inal, hercditar\'  differences  remain.     Some  raw  stuf!  is  so 
inferior  that  no  high  social  organii.ation  can  be  built  out 
of  it.    Some  stuff  cannot  respond  ver>'  effectively  to  the 
social  sUmuli.     But  qualitatively,  the  tendency  is  for  men 
to    become    what    society   expects.     Individuals   succeed 
more  or  less  in  meeting  social  expectation.     But  the  very 
elements  of  indi\idual  aspiration  and  ambition,  the  very 
self  of  the  individual,  are  molded  to  the  social  pattern,  and, 
with  the  same  racial  stock,  vary  almost  indcffnitely  from 
time  to  tune  and  from  place  to  place.,  with  the  mores.    If 
ornament  confers  distinction. -and  almost  everywhere  it 
does— men  will  seek  to  possess  ornaments. 


THE  ORIGIN  OF  MOVEY   AND  TlIE   VALITK   OF  GOLD     411 


Commonly  it  is  for  the  s;ike  of  the  other  sex  that  men 
seek  ornaments.  Ornaments  are  an  aid  in  wooing'  Men 
gain  wives  by  being  able  to  give  them  ornaments.  —Not 
that  this  is  the  whole  stor\ ;  -And  «)cial  exi)ectatior ,  al 
most  ever>'wherc,  requires  that  men  decorate  the  wives  that 
they  have  won.  Wives  Usually  reinforce  social  expecta- 
tion in  thi>  matter. 

Further,  the  desire  for  ornament  is  competitive.     One's 
women  must  l)e  belter  ornamentetl  than  the  women  of  one's 
neighbors,  if  distinction  is  to  be  gained  thereby.     But  this 
sets  a  faster  pace  for  the  neighbors,  and  the  standard  of 
social  expectation  is  raised  as  to  the  necessary  amount  of 
ornament.      It  is  the  same  sort  of  competition  that  arises 
among  armed  nations.     A  new  battle-ship  for  one  requires 
that  all  increase  their  naval  strength.     New  armies  in 
Germany  call  for  new  armies  in  P'rante.     A  vicious  circle 
is  created.     The  desire  for  ornnment,  unlike  the  desire  for 
food,  becomes  insatiable.    And  hence,  the  value-curve  for 
the  metal  used  as  ornament  sinks  ver\'  slowly,  being  re- 
duced, not  by  satiation  of  want,  but  by  limitation  of  eco- 
nomic resources.   I  need  not  elaborate  these  notions  further. 
They  are  of  the  same  .sort  that  V'^eblen  has  developed  in  his 
Theory  of  the  Leisure  Class.    They  rest  on  fundamentals 
in  human  nature,  however  much  they  differ  from  the  psy- 
chology 01  the  "economic  man."    They  give  assurance,  I 
think,  that,  unless  radical  change  in  tastes  and  fashions 
come  in,  which  displace  gold  and  silver  from  their  position 
as  ornaments  and  as  means  of  flisplay,  we  may  expect  the 
value  of  gold  to  maintain  itself  at  a  high  level  regard- 
less of  great  increase  in  quantity.     I  do  not  share  the 
view  which  Carlile  himself  seems,  at  times,  to  express  ' 

'C/.  Carlile,  Monrlary  Economics,  introductory  chapter.  The  whole 
question  may  hinge  on  terminoIoRy,  so  far  as  Carlile  is  concerned.  It  is  not 
clear  what  he  means  by  "  value  of  gold." 


412 


THE   VALUE   OF  MONEY 


I     t 


that  gold  does  not  sink  in  value  with  the  increase  in  quan- 
tity. It  seemr-  to  me  easily  demonstrable  that  it  has  sunk, 
and  does  m  >ut  I  should  expect  the  value  of  gold  to 
survive  the  shock  that  might  come  if  gold  were  entirely 
displaced  from  monetary  use  vastly  better  than  any  com- 
modity which  serves  wants  of  a  different  character  could 
stand  a  similar  shock.  The  demonetization  of  silver  has, 
of  course,  not  entirely  displaced  silver  from  the  monetary 
emplojTnent.  It  has,  however,  made  it  necessary-  for  the 
arts  to  absorb  a  greatly  increased  proportion  of  the  new 
silver,"  and  not  a  little  of  the  old  silver.  The  demonetiza- 
tion of  silver,  moreover,  was  accompanied  and  followed  by 
a  great  increase  in  silver  production.  But  silver  has  stood 
the  shock  amazingly  well.^ 

'  Cf.  Conant,  I'rindpUs  of  Money  and  Banking,  I,  ch.  7,  esp.  p.  102. 

»  I  do  not  belicNc  that  we  have  siinkient  aKreement  amonK  the  best  stu- 
dents of  the  statistics  of  the  precious  metals  to  justify  any  statistical  con- 
clusions rcKardinK  the  laws  fjoverninK  the  industrial  consum|)tion  of  jjold 
and  Sliver.  Even  the  facts  as  to  the  pro|K)rtions  of  annual  production  of 
Kold  in  recent  >ears  goinK  to  money  and  to  the  arts  are  in  dispute.  Thus, 
DeLaunay  (The  World's  Gold,  Xew  Nork,  1908,  p.  176),  divides  the  annua! 
output  as  follows:  Exportation  to  the  East,  and  loss,  i(.%;  coinage,  44%;  in- 
dustry, 40%.  The  industrial  employments  arc  divided  as  follows:  jewelr>-, 
^4%  (of  total  annual  gold  profluction);  watch  cases,  10%;  gold  leaf,  2.25%; 
watch  chains,  1.75%;  plate,  0.75%;  various  uses,  as  |)cns,  dentistry,  chemical 
works,  etc.,  1.25%.  DeLaunay 's  comj)etencc  as  an  authority  is  attested  by 
\arious  writers,  among  them  \V.  C.  Mitchell  (Business  Cvrtes,  p.  281). 
Mitchell,  comiKiring  DcLaunay's  estimates  with  divergent  estimates  of  other 
authorities,  concludes  that  there  is  not  sulVicient  evidence  to  justify  definite 
conclusions.  1  do  not  think  that  anyone  who  has  read  the  critic  isms  which 
Touzet  has  brought  together  (Emplois  Industriels  des  Milaiix  Prhieiix, 
Pans,  iqu,  pp.  40-52)  of  the  mctiuKls  employed  in  the  investigations  hy 
the  Director  of  the  United  .States  Mint  in  187Q.  1881,  1884,  1886.  and  1900, 
will  ha\e  large  conhdenie  in  the  exactness  of  the  results  reached  in  those 
investigations.  (See  annual  rejwrts  of  the  Direilor  of  the  Mint  for  the 
\ears  in  question.)  rouzcfs  careful  and  elaborate  stu.lv  emplox-s  the  figures 
gf  these  investigations  as  thi'  best  available,  but  with  substantial  misgivings, 
rhere  arc  many  indeterminate  elements  in  the  problem,  as  sht)wn  by  both 
Touzet  and  DeLaunay,  among  them,  the  extent  to  .vhich  coin  is  melted 
down  for  industrial  pur|M)scs. 

Ph.-  Dinrtor  of  the  .^{int  w„ul<l  .-.ssign  a  much  higher  pro|)ortion  of  the 
annual  output  to  coinage  than  would  DeLaunay. 


THE  ORIGIN  OF  MONEY  AND  THE  VALUE  OF  GOLD     413 

It  is,  of  course,  thinkable  that  the  attitude  of  mankind, 
under  new  social  conditions,  and  with  new  tastes  and 
fashions,  may  change,  with  reference  to  gold  and  silver. 
Love  of  approbation  and  distinction,  the  sex  impulse,  and 
the  spirit  of  rivalry,  are  eternal  elements  in  human  nature. 
But  their  manifestations  may  change.  There  have  been 
times  when  love  of  distinction  gratified  itself  in  poverty 
and  filth  and  asceticism.  Almost  anything  may  be  exalted 
into  a  social  ideal.  Society  may  even  reach  ideals  of  such  a 
sort  that  a  man  may  gain  social  approval  and  the  Icve 
of  woman  in  high  competition  with  his  fellows  in  the  service 
of  mankind!  But  even  here  gold  and  silver  may  have  a 
place.  They  are  beautiful,  as  we  now  see  beauty,  and 
beauty  itself  is  good  I  The  world  is  better  if  it  has  beauty 
in  it. 

It  is  just  as  well  to  conclude  at  this  point  what  I  shall 
have  to  say  regarding  the  value  of  gold  as  a  commodity.' 
The  same  quantity  of  gold  and  silver  may  have  widely 
var>'ing  values,  depending  on  the  Hstribution  of  wealth 
and  power.  It 'is  not  alone  intensity  of  individual  desire 
that  controls  values,  but  also  the  social  weight  of  those  who 
manifest  the  desire.  And  this  depends  on  the  legal  and 
other  institutional  values  concerned  with  social  organiza- 

lOarlier  studies,  by  Soetbeer  and  Suess,  seem  (juite  mil  i)f  harmony  with 
these  conclusions.  (Suess,  Eduard,  The  Future  of  Silver,  Washinnton, 
(iovcmment  Printing  Office,  iSgj,  pp.  51-53.)  Suess  thinics  that  virtually 
as  much  gold  was  going  into  the  arts  uses  as  was  being  produced,  in  iSqi, 
and  quotes  Soetbeer  (Litlcraturnackiveis,  \>.  285)  as  admitting  that  such  a 
contention  may  not  lie  demonstrable,  but  at  the  same  time  holding  that  it 
cannot  be  disproved. 

In  the  face  of  what  seems  to  Ik?  a  really  indeterminate  statistical  problem, 
I  content  myself  with  the  theoretical  conclusions  in  the  text.  Becau.se  I 
cannot  find  adequate  grounds  for  conlidence  in  the  main  source  from  which 
he  has  drawn  his  statistics,  I  refrain  from  a  criticism  of  the  theory  and  method 
underlying  Professor  J.  M.  Clark's  ingenious  effort  to  derive  statistical  laws 
for  the  elasticity  of  the  arts  demand  for  gold.  (American  Economic  Reviev!, 
Sept.  1913.) 

'  Cf.  our  chapter  on  "  Economic  Value,"  supra,  and  "  Social  Value, "  passim. 


f  : 

: :  i 


i 
I 

i 


■I 


I 
a 


II    -J 


414 


THE  VALUE  OF  MONEY 


tion.  The  point  is  strikingly  illustrated  by  Walker's  • 
account — designed  for  another  purpose — of  the  effect  on 
the  values  of  gold  and  silver  of  the  conquests  of  the  great 
Eastern  empires  by  Alexander  the  Great  and  the  Romans. 
The  production  of  gold  and  silver,  for  the  great  Eastern 
empires,  was  like  the  rearing  of  the  pyramids  in  Egypt. 
All  power  was  centered  in  the  hands  of  a  few  despots. 
Control  of  vast  masses  of  laborers  was  in  their  hands. 
The  social  values— it  is  difficult  to  classify  them  as  legal, 
economic  and  religious,  since  all  three  are  blended — gave 
little  weight  indeed  to  the  desires  of  the  masses,  and  tre- 
mendous weight  to  the  slightest  whims  of  the  despot. 
Thus,  since  the  love  of  gold  and  silver  was  intense  in  these 
despots,  and  since  religious  considerations  also  called  for  the 
accumulation  of  great  treasuries  of  gold  and  silver,  enormous 
numbers  of  laborers,  living  miserably,  toiled  in  the  mines 
to  produce  them,  and  amazing  stores  of  gold  and  silver  were 
accumulated.  The  precious  metals  had,  in  these  Eastern 
empires,  a  high  value  per  unit,  since  so  large  a  f)ortion  of  the 
social  energy  of  motivation  attached  itself  to  theii.  With 
the  conquests  by  Greeks  and  Romans,  however,  a  great 
change  came.  The  old,  gold-loving  despots  lost  their 
power.  The  conquerors  had  vastly  less  love  for  gold  and 
silver  for  their  own  sake.  Moreover,  the  leaders  among 
the  conquerors  had  very  much  less  power  in  their  own 
social  systems  than  had  the  oriental  despots.  Their  soldiers 
were  in  considerable  degree  free  mercenaries,  who  had  a 
right  to  a  share  in  the  spoils,  and  who  cared  much  less  for 
hoards  of  precious  metals  than  for  many  other  things.  In 
the  new  regime,  the  social  centre  of  gravity  was  changed. 
There  remained  few  who  loved  great  stores  of  precious 
metals  who  had  power  enough  to  accumulate  them.  Min- 
ing on  the  old  basis  was  impossible.  Though  slaver>'  per- 
'  F.  A.  Walker,  Inttrnational  Bimetallism. 


THE  ORIGIN  OF  MONEY  AND  THE  VALUE  OF  GOLD  415 

sisted,  more  and  more  of  the  labor  of  slaves  went  into  the 
production  of  things  that  the  masses  of  men  could  consume. 
Gold  and  silver  sank  enormously  in  value. 

Radical  readjustments  in  the  distribution  of  wealth  in 
our  own  day,  might  well  make  substantial  changes  in  the 
value  of  gold,  without  any  change  in  its  quantity.  That 
a  more  equal  distribution  of  wealth  and  power,  however, 
would  lower  the  value  of  gold  now,  as  in  the  case  just  dis- 
cussed, is  not  so  clear.  The  masses  in  the  Western  coun- 
tries are  already  fed  and  clothed,  as  a  rule,  even  in  times  of 
adversity,  and  usually  increasing  income  for  them  means 
increasing  expenditure  to  satisfy  less  pressing  wants,  and 
particularly  to  satisfy  wants  connected  with  social  esteem. 
The  laborer's  wi'c  ;-ets  an  expensive  cab  for  her  baby  when 
she  can  afford  it.  The  negroes  have  gold  fillings  put  in 
their  front  teeth — sometimes  when  the  teeth  are  sound! 
The  practice  of  giving  wedding  rings,  and  even  engagement 
rings,  is  spreading  among  the  poor.  Our  American  rural 
poor,  of  pioneer  stock,  have  had  less  concern  for  gold  and 
silver  ornament  than  the  masses  of  the  Asiatics  and  rer  it 
European  immigrants.  But  among  the  rural  poor  in  Amer- 
ica, as  city  standards  spread,  the  tendency  to  use  gold  and 
silver  ornaments  seems  to  be  increasing,  while  wc  may  with 
considerable  confidence  expect,  I  think,  that  the  rise  of  the 
immigrant  to  better  economic  conditions  will  mean  a  larger 
use  of  gold  and  silver  on  his  part.  Gold  leaf  on  ceilings 
and  radiators  would  cease,  doubtless,  except  for  public 
buildings,  if  great  fortunes  disappeared,  and  the  usv^  of 
gold,  at  least,  for  plate,  would  be  impossible  in  an  economic 
democracy.'  Silver  might  well  gain  in  value  at  the  ex- 
pense of  gold  if  there  were  radical  changes  in  the  distribu- 

•  Sec  DeLaunay,  The  World's  Gold,  Xew  York,  190b,  p.  176.  DeLaunay's 
figures  indicate  that  the  use  of  gold  for  gold  leaf  and  plate  is  quantitatively 
a  minor  factor  in  the  industrial  consumption  of  gold.  Jewelry  and  watch 
cases  are  the  most  important  items. 


11'    1 


If' 


I, 


f^. 


410 


THE   VAI.rr.   OF  MONEY 


tion  of  wealth.  It  is  notorious  that  prosperity  among  the 
agricultural  masses  of  India  is  promptly  followed  by  ab- 
sorption of  gold  in  that  country.  I  venture  no  concrete 
conclusions  on  this  ])oint,  beyond  the  general  conclusion 
that  a  redistribution  of  wealth,  with  no  change  in  the  quan- 
tity of  gold,  might  well  be  exi)ectcd  to  alter  the  value  of 
gold. 

It  may  be  added  that  the  general  impoverishment  of 
Europe,  growing  out  of  the  present  World  War,  will  prob- 
ably lower  the  marginal  value  of  gold  in  t  arts  (and  hence 
as  money)  in  considerable  degree.  From  this  cause  alone, 
to  say  nothing  of  causes  growing  out  of  the  money -employ- 
ment of  gold,  and  growing  out  of  the  values  of  goods  other 
than  gold,  we  might  expect  higher  prices  after  the  War  than 
before  the  War,  for  articles  of  consumption.' 

'  Capital  prices  of  lands  and  securities  might  well  be  lower,  if  interest 
rates  are  markedly  higher,  and  if  land  rents  and  "(luasi-rents"  sutler  from 
liisluT  wages  and  higher  interest. 


CHAPTER  XXII 

THE    FUNCTIONS    OF    MONEY    AND    THE    VALUE 

OF  MONEY 

In  preceding  chapters,  I  have  spoken  of  the  "money- 
service"  as  a  source  of  additional  value  of  money,  under 
certain  conditions.  Before  money  can  function  as  money 
at  all,  it  must  have  value  from  some  non-monetary  source.' 
But,  given  this  prior  value,  money  performs  valuable  serv- 
ices. These  valuable  services,  in  certain  cases,  add  to  ♦he 
value  of  money.  Moreover,  the  fact  that  money,  when 
made  of  a  metal  used  in  the  arts,  lessens  the  amount  avail- 
able for  use  in  the  arts,  raises  the  marginal  value  of  that 
metal  there,  and  consequently  raises  its  value  in  monetary 
form  as  well.  It  is  now  necessary  to  analyze  the  money- 
service,  and  to  see  in  precisely  what  ways  it  does  affect  the 
value  of  money.  And  first,  we  must  notice  that  the  money- 
service  is  not  simple,  but  compound;  that  in  fact  there  are 
several  services  of  money,  in  many  ways  distinct  from  one 
another;  that  not  all  money  can  perform  all  of  these  services; 
that  most  of  them  may  be  performed  by  things  other  than 
money,  that  these  services  are  not  all  equally  important 
as  sources  of  the  value  of  money,  and  that  the  same  service 
varies,  from  time  to  time  and  from  place  to  place,  in  its 
significance  from  this  angle;  and  finally,  that  one  of  these 
services  which  is  of  the  greatest  social  importance,  nameh-, 
the  "common  measure  of  values"  function,  does  not  add  to 
the  value  of  money  at  all. 

I  shall  not  now  undertake  a  history  of  theories  of  the 

'  cy.  chapter  on  "Dodo-Bones,"  iu^ra. 
417 


4i8 


THE  VALUE  OF  MONEY 


I 


,li 


functions  of  money.  Many  of  the  points  which  follow  are 
common  property  of  many  w^riters.'  The  nature  of  some 
functions  has  been  more  clearly  explained  than  that  of 
others.  I  have  not  found  in  the  literature  of  the  subject 
any  very  clear  statements,  moreover,  as  to  the  relations 
of  different  functions  to  the  value  of  money.  I  shall  try 
in  what  follows,  by  a  series  of  h>pothctical  cases,  to  isolate 
each  function  of  money,  as  far  as  may  be,  and  shall  try,  by 
varying  my  h>potheses,  to  indicate  variations  in  the  in- 
fluence of  the  dilTerent  functions  on  the  value  of  money. 

The  functions  of  money  have  been  variously  described 
and  named.    The  following  list  seems  most  satisfactory  to 

me: 

1.  Common  measure  of  values  (standard  of  value). 

2.  Medium  of  exchange. 

3.  Legal  tender  for  debts  {Zahlungs-  or  Solutions-mittcl) . 

4.  Standard  of  deferred  payments. 

5.  Reserve  for  credit  instruments,  including  reserve  for 
government  paper  money. 

6.  Store  of  value. 

7.  Bearer  of  options. 

The  common  measure  of  value  function  rests  in  the  in- 
tellectual needs  of  man.  It  grows  out  of  the  necessity  for 
calculation,  for  bookkeeping,  for  understanding  what  is 
going  on.    Any  object  of  value  may  be  used  to  measure 

'  Among  the  writers  who  have  treated  this  topic,  I  would  mention  es- 
pecially Menger,  "(icld,"  in  Haitduvrtcrbuch  der  Staatswissenschajlcn; 
Laughlin,  Pruuiplcs  of  Money;  Scott,  \V.  A.,  Money  and  Banking;  Knies, 
Das  Gild;  Walker,  F.  A.,  Money  and  Political  l-xonomy;  Conant,  Principles 
of  Money  and  Banking;  Seligman,  Principles  of  Economics;  Johnson,  J.  F., 
Moncv  and  Currency;  von  Miscs,  L.,  Theorie  dcs  Geldes  und  der  Vmlaufsmit- 
lei;  Helfferich,  ¥..,  Das  Geld;  Simmel,  Philosophie  dcx  Geldes;  Davenport, 
H.  J.,  Economics  of  Enterprise.  The  difference  between  the  standard  of 
value  frommon  measure  of  values)  function,  and  the  medium  of  exchange 
function  is  particularly  well  illustrate*!  by  Scott,  loc.  rit.,  ch.  i.  The  legal 
functions  of  money  are  es|)ccially  treated  by  Knap[),  Staalliche  Theorie  dcs 
Geldes. 


THE  FUNCTIONS  OF  MONEY 


419 


the  value  of  anything  else,  just  as  any  object  of  weight- 
say  an  irregular  mass  of  iron— may  be  put  in  the  balance 
against  some  other  object,  and  the  relation  between  the 
absolute  weights  of  the  two  objects  thus  more  or  less 
definitely  ascertained.'  But  it  helps  little,  in  getting  at 
the  aggregate  weight  of  a  collection  of  objects,  to  know  that 
A  among  them  is  heavier  than  B,  while  D  is  lighter  than  F. 
To  get  a  knowledge  of  the  situation  adequate  for  quantita- 
tive manipulation,  it  is  best  to  compare  all  of  the  objects 
with  some  one  object,  chosen  as  the  standard  of  weight,  or 
common  measure  of  weights.  Thought  is  thus  immensely 
simplified.  If  we  may  imagine  the  calculations  of  a  dealer 
in  a  rural  region,  where  no  common  measure  of  values  is 
used,  it  will  help  to  make  clear  the  nature  of  this  function. 
Let  us  suppose  that  he  deals  in  nails,  wire,  cotton  cloth, 
eggs,  butter,  hams,  sugar,  and  moonshine  whiskey,  and 
that  his  customers  also  make  and  use  most  of  these  things, 
using  him  as  a  central  clearing  house  in  their  rude  division 
of  labor.  Without  a  common  measure  of  values,  it  is 
necessary  for  him  to  keep  in  mind  the  price  of  every  com- 
modity in  terms  of  every  other  commodity.  If  there  are 
twelve  commodities,  this  means  66  ratios  which  he  must 
remember,  according  to  the  formula  for  permutations  and 
combinations.  In  general,  in  such  a  situation,  there  would 
be  the  following  ratios:  («-i)  +  (n-2)  +  (n-^)  -f  .  .  . 
(«-(»-i) ).    Let  him  choose,  however,  one  of  hb  commod- 


'  For  discussions  of  the  idea  of  measuring  values,  and  the  dependence  of 
this  on  the  conception  of  value  as  an  absolute  quantity,  a  common  or  generic 
quality  of  wealth,  see  Knies,  Das  Geld,  I,  ii3ff.;  Kinley,  Money,  6i-6j; 
Mcrriam,  L.  S.,  "Money  as  a  Measure  of  Value,"  Annals  of  the  American 
Academy,  vol.  IV;  Carver,  "The  Concept  of  an  Economic  Quantity,"  Quart. 
Jour.  ofEcott.,  i()07;  Laughlin,  Principles  of  Money,  1903,  pp.  14-16;  Daven- 
port, Value  and  Distribution,  p.  181,  n.;  Anderson,  Social  Value,  chs.  2  and 
II,  and  "The  Concept  of  Value  Further  Considered,"  Quart.  Journal  of 
Econ.,  191s;  Helfferich,  Das  Geld,  1903  ed.,  pp.  470-478;  Scott,  Money  and 
Banking,  ch.  i. 


:  ■( 


M 


H 


lii 


420  THE  VALUE   OF   MONEY 

ities.  siiy  eggs,  as  the  common  measure  of  values,  and  he 
needs  to  bear  in  mind  only  eleven  prices,  namely,  the  prices 
of  each  of  thi-  other  eleven  articles  in  eggs.  Thinking  is 
immensely  sim|>lirie(l.  In  general,  with  a  common  measure 
of  values,  dealers  need  bear  in  mind  only  (»-i)  prices. 
Suppose  that  at  the  end  of  the  day,  after  considerable 
trading,  our  dealer  tinds  the  following  changes  in  his  stock: 

//<•  //(j,v  gained  H<:  'w*  ^"^^ 

8  (loz.  i-ggs 12  lbs.  nails 

3  gallons  whiskey «  »«•  w'^ 

4  hams 13  lbs.  butter 

5  yards  cloth 1°  ^^^-  sugar 

Has  his  trading  been  profitable?  How  can  he  tell?  Re- 
duce all  the  items  in  both  columns  to  their  equivalents  in 
eggs,  however,  and  the  answer  is  very  easy.  No  compli- 
cated business  is  possible  without  this  common  measure, 
and  common  language,  of  values. 

Be  it  noted  that  this  common  measure  of  values  does  not 
necessarily  involve  the  use  of  a  medium  of  exchange.    The 
practice  of  thinking  in  a  conamon  measure  is  what  is  in- 
volved.   If  the  article  chosen  be  eggs,  which  all  are  accus- 
tomed to  use,  the  service  of  a  common  measure  might 
easily  be  performed  without  the  practice  of  indirect  ex- 
change, assuming  that  other  physical  difficulties  of  barter 
to  which  I  shall  shortly  refer,  were  absent.    Indeed,  as  I 
have  pointed  out  in  the  chapter  on  "Barter"  in  Part  II, 
a  great  deal  of  barter  goes  on  in  modem  life,  made  very 
much  easier  by  the  fact  that  we  have  a  common  language 
of  values,  a  common  measure  cf  values.    For  the  easy 
working  of  the  system,  it  is  important  that  the  common 
measure  of  value  be  an  article  with  whose  value  the  group 
is  well  acquainted.    The  frequent  testing  of  this  value  in 
actual  exchanges  vastly  facilitates  this.    But  actual  ex- 


THE  FUNCTIONS  OF  MONEY 


421 


change  is  not  necessary  for  the  performance  of  the  measure 
of  value  function.  VV'c  have  cases  where  the  measure  of 
values  and  the  medium  of  exchange  are  different.  Thus, 
in  the  Homeric  poems,  we  find  indications  that  cattle 
served  as  a  measure  of  values,  even  though  payments  were 
made  in  gold.  The  Virginians  commonly  thought  in  pounds, 
shillings  and  pence,  even  when  using  tobacco  as  a  medium 
of  exchange.  The  need  for  a  common  measure  of  values 
would  manifest  itself  in  any  complex  socialistic  society, 
even  though  exchange  were  largely  dispensed  with.  No 
systematic  plans  for  utilizing  the  resources  of  such  a  society 
would  be  possible,  no  bookkeeping  would  be  possible,  with- 
out some  such  device. 

For  this  function,  I  prefer  the  term,  "common  measure 
of  values,"  to  the  term  often  used  instead,  "standard  of 
values."  The  latter  term,  as  used  in  connection  with  the 
expression  "standard  money,"  sometimes  carries  the  con- 
notation of  "money  of  ultimate  redemption,"  and  its  main 
function  is  thought  of  as  serving  in  reserves.  The  reserve 
function  is  a  separate  function,  however.  It  is  common 
to  have  money  made  of  the  standard  metal  in  reser\x»s. 
But  this  need  not  be  the  case.  I  would  refer  once  more 
to  the  hypothetical  illustration  developed  in  the  chapter 
on  "Dodo-Bones":  gold,  not  coined,  as  the  "standard  of 
value";  paper  as  the  medium  of  exchange;  silver  bullion, 
at  the  market  ratio  with  gold,  as  the  reserve  for  redemp- 
tion of  the  paper.  This  may  suggest  that  a  distinction  may 
properly  be  drawn  between  measure  of  values,  and  ultimate 
standard  money.  The  paper  money,  in  this  case,  would 
be  the  thing  of  which  the  masses  would  ordinarily  think,  so 
long  as  the  system  worked  smoothly.  And  the  paper 
could  serve  as  a  measure  of  values.  The  case  is  not  unlike 
the  case  where  a  "standard  yard.''  or  "standard  pound" 
is  kept  for  ultimate  reference  in  a  government  bureau, 


432 


THE  VALUE  OF  MONEY 


ill 


irati 


while  yardsticks  or  pound  weights  in  the  shops  and  ware- 
houses do  the  actual  measuring.  The  cases  do  not,  indeed, 
run  on  all  fours.  The  measurement  of  weights  and  lengths 
involves  physical  manipulation ;  the  measurement  of  values 
is  an  intellectual  operation,  made  by  comparing  two  objects 
of  value.  The  comparison  may  be  made  in  actual  ex- 
changes; it  may  be  made  by  an  account:  -it's  estimate;  it 
may  be  made  by  comparing  the  results  of  several  exchanges, 
in  sorites  form,  only  one  of  which  involves  the  ultimate 
standard  measure.  The  yardsticks  actually  used  may  vary 
more  or  less,  by  accident  or  design,  by  variations  of  tem- 
perature, etc.,  from  the  standard  yard.  The  paper  dollars, 
under  a  smooth  working  of  the  system  described,  would  be 
held  closely  to  the  ultimate  standard,  and  would,  in  any 
case,  not  vary  as  compared  with  one  another  at  the  same 
time  and  place. 

When  the  metiium  of  exchange  diverges  in  value  from  the 
ultimate  standard,  as  in  the  case  of  the  American  Green- 
backs during  the  period  from  1862  to  1879,  we  have,  some- 
times, shifting  relations  among  the  functions.  The  Green- 
backs were  the  measure  of  value  most  commonly  in  use. 
They  were  legal  tender  for  debts,  except  where  gold  was 
specified  in  the  contract.  They  were  commonly  the  stand- 
ard of  deferred  payments.  To  a  considerable  extent,  how- 
ever, gold  was  used  in  reserves,  and  even  as  a  medium  of 
exchange.  People  titought  in  both  standards.  And  finally, 
gold  remained  an  ultimate  standard  to  which  the  Green- 
backs were  referred,  and  by  which  variations  in  their  value 
were  measured.  The  terms,  "primary  standard"  (gold) 
and  "secondary  standard"  (Greenbacks),  have  been  em- 
ployed to  aid  in  straightening  out  this  confusion.*  I  think, 
on  the  whole,  that  the  term,  "common  measure  of  values" 
describes  the  function  which  I  wish  to  emphasize  more 
'  Sec  Scott,  Money  and  Banking,  ch.  3. 


THE    FUNCTIONS   OF   MONEY 


423 


clearly  than  the  term,  standard  of  values,  and  I  shall,  in 
general,  employ  it  for  that  purpose.' 

The  medium  of  exchange  function  grows  out  of  the  phys- 
ical difficulties  of  barter,  rather  than  out  of  intellectual 
needs.  The  discussion  in  the  preceding  chapter  of  the  origin 
of  money  has  omphasizefl  the  nature  of  the  difficulties  which 
a  medium  of  exchange  meets.  A  has  an  ox.  which  he  wishes 
to  trade  for  shoes,  sugar,  and  a  coat.  Neither  shoe-maker, 
tailor  nor  grocer  cares  to  take  the  ox.  however,  and.  besides, 
no  one  of  them  could  supply  A  with  all  three  of  the  things 
he  wishes  to  get.  Moreover,  even  if  A  should  meet  a  man 
who  had  all  three  things,  he  would  not  care  to  give  up  the 
ox  for  them,  since  the  ox  is  worth  more  than  all  three.  If 
there  be  a  medium  of  exchange,  however,  A  may  sell  his 
ox  to  the  butcher,  and  take  his  pay  in  that  medium,  which 
will  be  something  easily  and  minutely  divisible,  buy  coat 
and  sugar  and  shoes,  and  take  the  surplus  of  his  medium  of 
exchange  home,  waiting  for  another  occasion.  The  medium 
of  exchange  function  overcomes  the  difficulties  arising  from 
low  saleability  of  many  goods,  due  to  limited  number  of 
possible  buyers,  lack  of  divisibility,  etc.,  etc. 

The  common  measure  of  va.ues  aids  greatly  in  determin- 
ing the  prices,  the  terms,  at  which  exchanges  may  be  made; 
the  medium  of  exchange  makes  possible  exchanges  which 
could  not  be  made  at  all  in  its  absence. 

The  measure  of  value  function  does  not  add  to  the  value 
of  money.  The  medium  of  exchange  function  is  commonly 
a  cause  of  additional  value  for  money.  The  source  of  this 
extra  value  is  the  gains  that  come  from  exchange. 

Exchange  is  an  essential  part  of  the  productive  process, 
where  you  have  division  of  labor  with  private  ownership 


'  .\  further  reason  for  preferring  "common  measure  of  values"  is  that 
expression  carries  clearly  the  con'  itation  of  absolute  values.  "Relative 
values"  cannot  be  "mcasurfd,"  6i'c»u/  Value,  pp.  26-27. 


4-'l 


nn.  \  Ai.n.  np  monky 


;li 


•  'I  iho  jTi>trunH'nts  oi  production,  and  privutr  cnk-rprisc. 
\alui'N  may  be  cn-ali'<l  by  chanfjiriK  the  forms,  the  time, 
the  pliuc,  or  thf  ownership  of  goinls.  All  these  o[)erutions 
are  net-essiiry  in  an  eronomic  system  like  our  own.  Those 
who  f)<)ssess  money  are  in  a  position  to  take  toll,  in  values, 
tn)ni  those  whu  wish  tit  get  rid  of  the  jjimmIs  which  they  have 
pntdueed.  and  to  ^-et  hold  of  the  ;,'(tods  which  they  wish  to 
consume.  The  holders  of  money  flo  this  by  means  of  the 
money,  and  under  the  laws  of  etifuomic  imjiulation,  these 
gains  are  attributed  to  the  money  itself,  first  in  the  form  of  .i 
rental  value,  and  sometimes,  under  conditions  later  to  be 
discussed,  as  increment>  to  capital  value. 

Before  giving  full  <lis«  ii^sion  to  this  topic,  it  will  be  well 
to  consider  certain  other  functions,  which  are,  or  may  lie, 
sources  of  value  for  rmoncy. 

The  reser\e  for  credit  instruments  function  cannot  be 
fully  diacu=se<l  till  we  take  up  credit.  Provisionally,  it  may 
be  said  thjit  it  is  a  source  of  absolute  value  for  money,  ficr 
sc,  even  though  the  cfTe(  t  on  prices  may  be  that,  owing  to  a 
rise  in  the  values  of  goods,  the  prices  rise.  The  fact  of 
credit  may  even  tend  to  lessen  the  absolute  value  of  money 
itseh.  by  lessssening  the  value  that  comes  to  monej'  from  the 
medium  oi  exchange  function.  On  the  other  hand,  credit 
increases  exchanges,  making  pt)ssible  a  vast  mass  of 
transactions  which  without  it  would  not  occur  at  all.  Of 
course,  in  <;«ir  h>-])othetical  case  above,  where  the  reserve 
for  credit  nstruments  is  silver  bullion,  the  reserve  for 
credit  instruments  function  does  not  add  to  the  value  of 
money  at  all. 

The  "bearer  of  options"  functicm  i>\  money  is  also  a 
source  of  value  for  monev.     It  i>  a  valuable  service.     The 


'("urrfUl  U\l  IxHik^,  |iillin\in;:  tin-  \u-.trian  iliHlriru.  di'linc  priMiiu  lion 
.1^  tlv,'  (Ti-ation  of  •■uUlilics."  This  is  innirri-it.  I'roclutlion  >s  thf  ereation 
III  ;ii/«o.     I/.  SiniitI  i'ltliir,  p|).  i  K)  am!  iS<). 


THE   FUNTTIONS  t)F   MoVEY 


425 


man  who  holds  moniy,  wuiting  his  < hana-  fn  a  Huctuutinx 
market,  anticipati-s  a  gain  which  justitk's  him  in  huldinj? 
his  (apital  without  ritiirn  ujHjn  it.  M<»my  i>  not  alone  in 
jHTfomiinj,'  this  siTviie.  High  gradf  Ittmds  also  perfonn  it. 
They  bear  a  lower  yield  |)er  annum  to  compensate.  The 
service  of  bearing  options  is  itself  a  part  of  the  yield,  and  is 
itself  ca|ntali/i'«l,  in  their  ease.  Two  5'  ',  bonds,  each  equally 
secure,  but  one  of  which  has  a  wide  market,  while  the  other 
ha--  a  restricted  market,  will  have  a  very  unequal  value. 

rhi>  "bearer  of  oj»tions"  function  is  often  identified 
with  the  "store  of  value"  function.  The  two  are  pro|>erly 
distinguishinl.  If  a  man  has  in  mind  a  delinite  contingency, 
at  a  delinite  future  time,  fnr  which  he  wishes  to  hold  a 
.store  of  value,  he  may  well  find  that  a  high  >ield  bond,  or  a 
loan  u|>on  real  i-state,  or  many  other  productive  invest- 
ments, will  ser\ f  him  better  than  money  or  bonds  with  wide 
market.  So  fur  as  money  is  concerned,  the  "Ijcarer  of 
options"  function  is  much  more  imjxjrtant  than  the  "store 
of  value"  function  to-day.  The  reserve  of  value  in  liquid 
f«)rm,  for  undated  emergencies  (like  the  War  Chest  at 
Spandau,  or  the  big  reserve  accumulated  between  1900  and 
1913  by  the  Banque  de  France),  wt)uld,  from  the  point  of 
view  of  thi-  tlistinction,  come  under  the  "bearer  of  oi)tion" 
function,  rather  than  the  "store  of  value"  function.  The 
important  thing  about  the  distinction  is  that  for  one  purpose 
a  high  degree  of  saleability  in  the  thing  chosen  is  neces-sary, 
while  in  the  other,  such  is  not  the  case.  The  most  common 
case  of  the  "bearer  of  options"  function  arises  when  men 
hold  money,  liquid  securities  of  low  yield  and  stable  value, 
short  loans,  call  loans,  or  bank -deposits,  waiting  for  special 
opportunities  in  the  market. 

The  mefiium  of  exchunce  function  would  exist  in  a  sonVty 
where  business  goes  always  in  accustomcnl  grooves,  where 
uncertainty  is  bani.she<l,  and  where  most  of  the  assumptioas 


i  f 


426 


THE  VALUE  OF  MONEY 


[I  il 

lit 


.J 


it  • 

hi 


of  static  economic  theory  are  realized.  If  we  push  static 
assumptions  to  the  limit,  and  assurie  "friction"  of  all 
sort  gone,  assume  that  all  goods  can  flow  without  trouble 
or  expense  to  the  i)luces  and  persons  where  their  values  are 
highest,  etc..  even  the  medium  of  exchange  function  would 
disappear.  But  if  we  make  our  static  assumptions  a  bit 
more  realistic,  leaving  the  *'  '-iction  "  of  barter,  but  banishing 
the  need  for  readjustment,  and  the  uncertainties  that  grow 
out  of  dynamic  changes  (whether  caused  by  growth  of  pop- 
ulation, or  changes  in  laws  and  morals,  or  in  fashions  and 
tastes,  or  in  technical  methods,  or  by  accidents  of  various 
kinds),  then  the  medium  of  exchange  function  will  still  re- 
main. Given  dynamic  changes,  we  have  need  for  a  vast  deal 
more  of  readjustment,  and  a  vast  deal  more  of  speculation. 
I  have  shown  in  the  chapter  on  "The  Volume  of  Money 
and  the  Volume  of  Trade"  that  the  great  bulk  of  trading 
in  the  United  States  to-day  is  speculation,  which  increases 
or  decreases  with  the  amount  of  dynamic  change,  with 
its  accompanying  uncertainty  and  need  for  readjustment. 
The  major  part  of  the  medium  of  exchange  function  arises 
from  this.  The  whole  of  it  arises  from  factors  which  purest 
static  theory  is  accustomed  to  abstract  from.  The  whole 
of  the  "bearer  of  options"  functions  arises  from  dynamic 
change.  This  is  the  dynamic  function  of  money  par  excel- 
lence. It  is  commonly  treated  by  economists  as  an  unusual 
and  unimportant  function.  Merged  with  the  store  of  value 
function,  it  is  frequently  treated  as  of  historical,  rather  than 
present,  imiwrtance.  In  my  own  view,  it  is  of  high  present 
importance.'  I  should  count  it  as  in  considerable  degree 
a  function  (using  function  in  the  mathematician's  sense)  of 
"business  distrust"  -  waxing  and  waning  in  importance  as 

'  This  is  the  view  of  H.  J.  Davenport  {Economics  of  Enterprise,  pp.  301- 
30-'). 

-  Kimmt-rer  has  shown  this  to  l)c  true  of  ban!;  reserves.  As  we  shall  see, 
the  reserve  funilion  is  merely  a  siK;cial  case  of  the  "bearer  of  options" 


THE  FUNCTIONS  OF  MONEY 


427 


business  distrust  increases  and  decreases.    In  past  ages, 
this  function  was  primarily  concerned  with  consumption, 
money  and  other  goods  being  held,  at  the  loss  of  interest, 
as  a  safeguard  against  personal  danger  and  as  a  means  of 
subsistence  in  emergency.    Increasingly  to-day,  it  is  con- 
cerned with  acquisition  of  wealth  in  commercial  transactions. 
When  war  and  domestic  violence  were  the  main  cause  of 
social  disturbance,  the  consumption  aspect  was  most  promi- 
nent.  That  aspect  came  strongly  to  the  fore  at  the  outbreak 
of  the  present  war.    The  heavy  selling  of  securities,  which 
closed  the  bourses  of  the  world,  grew  out  of  men's  efforts 
to  get  money  and  bank -credit  as  a  "bearer  of  options"  for 
the  old  reasons.    The  old  reasons  explain  in  large  measure 
the  accumulation  of  gold  by  the  Banqiie  de  France,  and  by 
the  German  Government,  referred  to  above.    But  to-day,  in 
general,  the  main  purpose  of  those  who  use  money,  or  other 
things,  as  a  "bearer  of  option    '  is  to  make  gains,  or  avoid 
losses,  in  mdustry  and  trade.    The  man  who,  in  a  given 
state  of  the  market,  is  afraid  to  lend,  or  afraid  to  invest, 
foregoes  the  income  which  lending  and  investing  promise, 
and  holds  his  money.    The  man  who  sees  uncertainty  and 
fluctuation  in  the  market,  and  expects  them  to  give  him 
bargains  in  time,  foregoes  income  for  a  time,  and  holds  his 
money.    The  man  who  has  investments  of  whose  future  he 
is  uncertain,  and  who  fears  to  try  any  other  investment 
for  a  time,  sells  what  he  has,  foregoes  income,  and  holds  his 
money.    It  is  not  always  possible,  in  discussing  the  money 
functions,  to  preserve  the  distinctions  between  money  and 
credit,  or  money  and  "money"  in  the  money-market  sense. 
How  much  difference  is  made  by  these  distinctions  will  best 
be  discussed  in  our  chapter  on  "Credit. " 
The  significance  of  the  "bearer  of  options"  function  is 

function.     For  Kcmmerer's  discussion  of  business  distrust,  see  Motuy  and 
Credit  Instruments,  pp.  124-126,  and  144. 


i 


428 


THE   VALUE   OF   MONEY 


cspt'cially  manifest.  I  think,  in  connection  with  call  loans. 
The  "call  rate"  is  commonly  well  below  the  regular  "dis- 
count rate. "  or  rate  for  thirty-day,  si.\ty-<lay.  or  ninety-day 
paper.    The  explanation  is  to  he  found.  I  think,  in  the  fact 
that  the  lender  (i  call  money  does  not  entirely  dispense 
with  its  service.     He  reserves  a  part  of  the  "bearer  of 
options "  function.     To  be  sure,  he  will,  in  practive.  have  to 
wait  ar.  hour  or  two.  or  even  more  for  it.'  and  this  may  well 
mean  that  he  cannot  take  full  advantage  of  nn  option. 
But  the  right  to  demand  money  on  "ven  twenty-four  hours' 
notice  is  more  available  than  a  high-grade  bond,  as  a  means 
of  meeting  rapidly  changing  situations.    This  principle  will 
explain,  too.  I  think,  why  money-rates  in  general,  includ- 
ing even  ninety-day  paper,  are  usually  lower  than  the  long- 
time interest  rate  on  safe  farm  mortgages,  or  on  real  estate 
mortgages  in  a  city.    The  thirty-day  rate  will  commonly 
be  lower  than  the  sixty-  or  ninety-day  rate     though  excej>- 
li(ms  can  easily  be  found,  if  the  thirty-day  period  is  to 
cover  a  time  of  active  business,  which  is  expected  to  grow 
less  active  during  the  second  or  third  month.     The  influence 
of  the  bearer  of  opti(ms  functions  is  not  the  only  influence 
at  work  on  the  rates.     If  it  be  objected  that  the  long-time 
interest  rate  on  high  grade  railroad  l)on<ls  or  government 
securities  is  sometimes  lower  than  current  money-rates,  or 
just  as  low.  the  answer  is  that  these  bonds  also  share  the 
"bearer  of  t)ptions"  function,  and  that  the  interest  rate  t)n 
them  is.  like  the  m(mey-rate.  lower  than  tht  "pure  rate" 
of  interest.     Writers  -  have  been  anustonn-d  to  look  for 
the  "pure  rate"  of  interest,  /.  r..  an  interest  unmixed  with 

'••III  Niw  \ufk.  fi.r  inNl.in.i',  Nans  by  \>.inV-  •on  i.ill'  .in-  Milijn  I  to 
ri|.a>ni.nl  uilliin  .in  hour  or  tw.i  aftt  r  m.li.r  i-  nivin  ih.il  rf|..iymcnl  is 
disiml."  Con.int.  /V/i'< //>/.<  of  M<>ii,y  and  Htiiikin^.  vol.  II.  |).  s<>-  '» 
k'lmral.  the  hanks  arc  ronlinl  if  the  loan  is  rrpaid  l>y  s  o'l  l<«k  on  Ihc  day 

il  is  rallnl. 

-  /■;.  i;..  Cdiriii'.-,  J.  1;.,  LoidiiiK  I'rliu  iplf.  <'/  I'olitiml  l.u)iumiy. 


THE   FUNCTIONS   OF  MONEY 


439 


insurance  for  risk,  in  the  highest  grade  of  government  se- 
curities. I  think  that  this  is  a  mistake.  I  think  that  the 
"pure  rate"  should  be  sought  in  long-time  loans,  of  assured 
safety,  whicli  lack  a  general  market.  Such  loans,  at  the 
time  they  arc  made,  shcmld  represent  the  "pure  rate"  for 
that  time. ' 

I  shall  recur  to  the  question  of  the  money-rates,  and  the 
(juestion  of  the  relation  of  the  money-rates  to  the  general 
rate  of  interest,  in  the  chapter  on  "Credit." 

For  the  present  I  would  call  attention  to  the  interesting 
case  of  Austria,  where  the  money-rates  are  normally  very 
l»)w,  because  the  volume  of  commerce  and  speculation  is 
small,  and  the  volume  of  banking  capital,  politically  fos- 
tered, is  large;  and  where,  on  the  other  hand,  the  general 
rate  of  interest  on  long-time  loans  is  high,  owing  to  the 
.scarcity  of  capital  in  industry  and  agriculture,  as  distin- 
guished from  commerce.'-  This  case  may  illustrate,  inci- 
dentally, that  even  as  a  "long  run"  or  "normal"  tendency, 
an  excess  of  currency  in  a  country  may  lead,  not,  as  ihe 
quantity  theorists  contend,  to  high  prices,  but  rather  to 
low  mone\-rates.  Austria  presents  simply  a  striking  case 
of  what  I  should  regard  as  the  general  tendency.  The 
money-rates  and  the  interest-rates  tend  to  approach  one 

•  Oiif  "luiru  rati"  is  a  myth,  l)ut  thi  notion  has  some  sijjnilicani  c,  as 
Mllini;  off  a  iKKiy  of  (uusos  distim  t  from  the  moncx -markot  factors  under 
consideration.    (/.  aiipra,  the  ih.  on    "The  Capitalization  Theory." 

-  See  von  .Mises,  "The  I'oreik'n  Ia<  hanKe  Policy  of  the  .Vustro-HunRarian 
Hank."  British  Edinomk  Jour  -.il.  looo.  |»|>.  2o,S-.'cx).  \n  able  Boston 
broker,  in  I'eh.  km;,  calls  altenli<.n  to  the  Krowinj;  dilhculty  of  placing 
longtime  Uinds.  without  very  hi>;h  \ield.  in  view  of  the  .scarcity  of  real 
lapilal,  <lespite  Ihe  exceedin^^ly  low  iiionej-rates."  F  venture  to  predict 
an  increasing  "  spread"  iMtween  'nioneN -rates"  and  the  yield  on  lonK-tinie 
investments,  the  longer  the  War  lasts,  Fhe  view  of  l)aven|M(rl  and  Schuni- 
|>elcri,lM»*>///>/,  1VI>.  .'S,  1916,  and  Tlnorir  il.r  i.iriM  luifUiilicn  /uihritklmiR). 
which  would  deny  the  validity  of  the  distim  tioii  Intween  money-rates  and 
interest  rate-,  and  \voul<l  make  the  money  m.irket  phenomena  the  primary 
C.KIM-  of  all  interest  phenomena,  seems  to  me  indefensible,  alike  in  theory 
and  i>i  fact. 


43° 


THE  VALUE  OF  MONEY 


m 


another  to  the  extent  that  paper  representatives  of  many 
different  industries  get  into  the  "money  market"— to  the 
extent  that  industrial  investments  in  general  become  sale- 
able enough  for  it  to  be  safe  to  fmance  them  by  means  of 
short-time  banking  credit.    When  banks  lend  on  collateral 
security  of  coq^oration  stocks  to  the  buyers  of  those  stocks, 
they  are.  in  effect,  tinancing  the  corporation  itself.'     In- 
dustries differ  widely  in  the  extent  to  which  they  depend 
t)n  the  money  market  for  their  finances.    The  difference  de- 
pends often  less  on  the  nature  of  the  industry  than  on  the 
tvT>e  of  the  industrial  organization.    An  individual  farmer 
cannot  get  the  bulk  of  his  credit  that  way!    But  there  is 
no  reason  why  a  well-organized  corporation,  assuming  it  suc- 
cessful in  agriculture,  might  not  draw  on  the  money  market, 
even  if  not  so  freely  as  a  manufacturing  corporation  does. 
For  the  contention  that  the  money-rates  for  short  periods 
are  lower  on  the  average  than  the  rates  on  longer  loans,  and 
that   the  call   rates  are,  on   the  average,  well  below  all 
time  rates,  there  is  abundant  statistical  evidence.     From 
1890  to  1899  in  New  York  City,  the  average  rate  on  4-  to  6- 
month  paper  was  5.99*^  < ;  the  average  rate  on  60-  to  90-day 
paper  was  4.58'^<' ;  the  average  call  rate  was  3.29'^t.    In  the 
same  city,  for  the  period  from  1900  to  1909,  the  averages 
were:  4-  to  6-month  paper,  5.61'^c;  60-  to  90-day  pai)er, 
4.7890;  call  rate,  4.05^;;.'-    This  last  figure  for  call  loans 
represents  an  average  of  cjuotations  at  the  "Money  Post" 
at  the  Stock  Exchange.    While  normally  the  call  rates  are 
well  below  this,  occasional  high  figures,  like  those  in  1907, 
pull  this  average  up.    The  high  rales  at  the  "  Money  Post, " 
however,  are  not  always  repr-'sentative.     Banks  frequently 
do  not  charge  their  regular  customers  as  much  as  the  quoted 
rates. 


'  Cf.  the  analysis  of  bank  loans  in  the  United  States,  infra. 
»  Mitchell,  Hitsiiicss  C.vWo,  p.  14O. 


THE    FUNCTIONS  OF  MONEY 


4.U 


Even  more  detailefl  evidence  for  our  thesis  is  to  be  found 
in  VV.  A.  Scott's  investigation  of  New  York  money-rates, 
for  the  peri(Mi.  1896  1906.'  He  studies  t'ivo  sets  of  quota- 
tions for  call  loans,  those  at  the  Stock  F.xchanjre  'Money 
Post"  and  those  at  the  hanks  and  trust  companies;  snen 
sets  of  quotations  ffive  of  which  appear  regularly)  under 
the  head  of  "time  loans."  namely.  30-.  60-,  90-day.  and 
4-.  5-,  6-.  and  j-month;  and  three  under  the  head  of  "com- 
mercial paper."  namely,  double  name  choice  60-  to  90-days, 
and  two  varieties  of  single  name  paper. 

He  finds  a  clear  tendency  for  the  rate  to  vary  with  the 
length  of  the  loan,  although  noting  many  exceptions. 
"The  dilTerence  between  these  rjuotations  rarely  exceeds 
one-half  of  one  percent,  and  the  general  rule  seems  to  be 
that  the  influence  of  time  in  raising  the  rate  grows  less  as 
the  length  of  the  loan  increases.  For  example,  there  is  apt 
to  Ix;  a  greater  dilTerence  between  the  quotations  of  60- 
and  90-day  paper  than  between  90-day  and  four  months. 
Likewise  there  is  a  greater  difTereiK  e  between  90-day  and 
four  months  than  between  4-months  and  5-months  paper." 

The  call  rate,  though  much  more  variable  than  all  time 
rates,  and  sometimes  high  above  them,  is,  on  the  average, 
well  below  them.  For  the  period,  1901  06,  the  averages 
are:  call  loans,  j.^'^r,;  time  loans.  4.5%. 

The  declining  influence  of  differences  in  time  as  the 
length  of  the  loans  increases,  is  what  our  theory  would  re- 
quire. If  the  "bearer  of  options"  functions  of  short  loans 
is  the  explanation  of  the  lower  rate  on  them,  it  is  a  factor 
which  would  count  for  less  and  less  as  the  length  of  the 
loan  increases.  A  month's  ditT«rence  is  all-important, 
when  the  month  invob cd  is  i)roximate,  say  the  difference 
between  10  and  40  days.  But  it  is  of  virtually  no  impor- 
tance, from   the  standpoint  of  the  man  who  wishes  to 

'  Journal  of  Politka'.  Eioiwmy,  X\'I,  .May,  1908,  pp.  .^^-zijS. 


4.^^ 


Tirr.  v\UTF,  OF  Moy?:Y 


meit  sudden  and  indctt'miinale  cmerK'tncics.  whether  the 
note  he  holds  matures  in  eleven  months  or  twelve  months. 
The  dilTerei\ee  between  a  one-year  loan  and  a  live  year  loan 
nii>?ht.  on  the  other  hand,  still  he  im|M>rtant  from  the  anjjle 
«)f  bearing  options.  The  factor  should  eease  to  have  any 
meaning  at  all.  «»r  at  least  any  appreciable  meaning,  when 
the  ditTerente  is  between,  say.  twenty  and  twenty -five 
years. 

I  have  no  statistical  evidence  that  the  one-year  loan 
can  normally  e.xpect  a  lower  rate  than  the  five-year  loan. 
At  times.  sh«>rt  time  financing  may  be  even  more  exix-nsive 
than  long  time  fmancing.  Hut  such  study  as  I  have  given 
to  quotations  of  short-term  n(»tes  of  corixirations,  as  com- 
pared with  the  longer  term  bonds  of  the  same  cori)orations, 
would  leave  the  distinct  impression  that  short-term  m>tes 
fare  l)etter  in  the  security  market,  and  yield  less  return. 
A  complication  arises,  here,  of  course,  that  the  short-term 
note  may  often  lack  the  safety  which  a  first  mortgage  bond 
of  the  same  coq>oration  would  have. 

The  legal  tender  for  debts  function  calls  for  a  brief  dis- 
cu>sion.  Whatever  gives  legal  (juittance  from  contract 
ol)ligation.  or  from  legal  obligation  as  for  taxes,  jK-rforms 
this  function.  "Legal  tender"  money,  in  the  strict  sense, 
is  not  alone  in  performing  this  function.  Usually  a  govern- 
ment will  by  law  or  a<lministrative  practice  with  the  force 
of  law.  bind  itself  tt)  accept  forms  of  monc\  which  it  will 
not  compel  other  creditors  to  accept.  Ihus,  silver  certifi- 
cates, without  being  "legal  tender  '  are  a  means  of  legal 
quittance  from  obligatitms  to  the  Fetleral  (iovernment. 
Sometimes  governments  will  receive  only  gold  at  the  cus- 
toms hou.^e.  This  was  true  in  the  (Greenback  iKTicnl,  when 
Greenlxuks  were  "legal  tender."  but  not  good  for  payments 
of  customs  «luties.  The  reader  who  is  interested  in  refine- 
ments of  the  legal  distinctions  among  different  kinds  of 


Till;    FUNCTIONS  OK   MONKV 


433 


money  will  find  the  thing  elaborately  worked  out  by  (;.  F. 
Knapp,  in  his  StmiUichc  Theoric  dcs  Gcldes.^  But  "legal 
tender"  money  is  not  always  an  adequate  means  of  quit- 
tance.   If  the  contract  calls  for  corn,  or  wheat,  or  North- 

'  lA-ip/.iK,  i()05.     riiis  IxMik  has  had  wide  inllucncc  im  (ii-rman  thinkinK 
on  m.incy.     It  is  t\|)i».il  t.f  ihc  timkniy  in  (K-rman  IhouRht  to  make  the 
Slate  llie  (entre  of  everything.     KciDRnizinK  the  historical  fact  that  money 
has  oriKinatcil  in  a  »omm<Mlity,  it  holds  that  the  commtnlity  Iwisis  is  a  phe- 
nomenon of  historical  siKnilicance  only,  that  modern  mcmey  is  a  creature 
of  the  State.     The  moniy-unit  is  not  detinal>le  as  a  quantity  of  metal,  of 
k'iven  (ineness.  hut  rather  is  a  "nominal"  thinj,'.  present  mimetary  standards 
UmK  defined  by  le^al  |)r(Hlamation  in  terms  of  |)ast  standarrl.s.    The  ncces- 
.sity  for  this  reference  to  last  standards  Krows  out  of  the  existence  of  fast 
debh.    The  State  must  preserve  I  he  continuity  of  juristic  relations,  between 
debtors  and  creditors  as  elsewhere.     Knapp  holds  that  the  Zahliingsmillrl 
(lenal  means  of  <|uiltance,  legal  tender)  funt  tion  is  the  primary  func  lion  of 
money,  and  that  it  is  not  a  concept  sul)ordinale  to  Tnuschmiltel  (medium 
of  exchanRe).    Ft  is  not  neccs.sary  for  our  pur|)oses  to  take  account  of  Knapp's 
theory  in  detail,    lie  really  has  little  to  .sjiy  alx)ut  the  value  of  money.    In- 
deed, he  confesses,  in  a  later  discus.sion,  that  his  theory  is  not  concerne<l 
with  that  subject:     (Siliri/lni  dcs  Vmiiis  fUr  Sozialptditik,  No.  i,p,  igog, 
PI'-  55Q-SfM)    The  amount  of  economic  analysis  in  the  lxx)k  is  not  great. 
It  is  a  striking  illustration  of  the  fact  that  iegal  thinkinj?  is  largely  con- 
cerned with  qualiMivc  distiin lions,  rather  than  with  quantitati\e  cau.sal 
ccmceptions.    (Cf.  my  disiussion  in  the  chapter  on  "The  Reconciliation  of 
Statics  and  Dynamics,"  infra,  of  the  "statics"  of  the  law.)     Knapp's  Ijook 
has  a  forbidtling  api^arance,  In-cause  of  the  large  number  of  new  terms, 
b;ise<l  on  (Ireek  roots,  which  he  has  coined.    The  (Jerman  language  is  in- 
afle<|uate  to  express  his  ideas!    The  (iermans  themselves  have  complained 
much  of  this.    Careful  reading  of  the  Uxik  <liscloses,  however,  that  the  new 
terms  arc  admirably  adaptetl  to  express  the  <listinctions  he  draws.    I  think. 
ttK).  that  Knglish  readers  of  the  Ixxjk,  who  rememljcr  enough  »if  their  (ireek 
to  recognize  an  (Kcasional  (ireek  r.H)t  as  vaguely  familiar,  will  tind  less 
dirticuify  in  giving  lixe<l  meanings  to  his  new  terms  than  would  Ijc  the  case 
with  new  (ierman  com|K)unds.    One  who  takes  the  trouble  to  master  Knapp's 
viuabulary  will  find  the  effort  worth  while.     Knapp  has  a  high  order  of 
dialectical  acumen.     Hut  the  main  (wrt  of  ihe  lMK)k  has  little  <lirect  Ix-aring 
on  the  problem  of  the  value  of  money,  whether  one  understand  by  "value 
of  money"  the  ubsi>lute  sinial  value  of  money,  or  the  reiipnKal  of  the  price- 
level.     The  main  jMiints  to  Ik;  drawn  from  his  distus-sion  are  (,i>  the  fact 
thai  iKist  debts  may  tend  to  sustain  the  \alue  of  an  otherwise  worthless 
money;  and  (.)  that  the  Stale'>  willingness  to  accept  money  for  taxes,  etc., 
may  also  contribute  to  its  valu.'.     Knapp  la\s  heasiist  stress  on  this  hist 
|>oint.     He  >*ems  to  concede,  however,  that  the  r«le  of  Ihe  State  here  i>  not 
ililTerent  from  that  of  any  ..llur  big  factor  in  the  market,  ami  that  the  States 
IKiwcr  in  this  |.,irti.    jar  isa  function  of  the  magnitude  of  its  tiscal  operations. 
Both  ..I  thcM.  .luitrines  ht  rca<lily  into  my  social  value  theory.     Knapp's 


434 


THE  VALUE  OF   MONEY 


1 


cm  Pacific  stock,  the  best  legal  tender  money  is  a  poor 
substitute!  Witness  the  "Corner"  in  Northern  Pacific 
in  TQOi.  It  is  doubtless  true,  as  Davenport  '  iK)ints  out, 
that  all  contracts,  whatever  they  call  for,  may  be  ultimately 
met,  under  the  common  law,  by  money  <lamages,  but  that 
does  not  mean  that  a  man  can  maintain  his  solvency  or 
position  in  business  by  ofTering  money  when  Northern 
Pacific  is  designated  in  his  contract.  Doubtless  even  there 
money  will  free  him.  at  a  price,  but  Northern  Pacific  stock 
is  at  least  more  convenient  for  the  puq)ose!  A  man  does 
not  need  money  to  get  free  from  debts,  even  when  money  is 
required  by  the  contract.  He  can  turn  in  whatever  he  has 
in  an  assignment  for  the  benefit  of  his  creditors,  and  get 
free  via  the  bankruptcy  court.  In  other  words,  the  legal 
tender  function  of  money,  while  it  does  distinguish  money 

discussion  of  meth<x!s  of  rcRuIatinR  the  international  exihanKCS  by  methods 
other  than  j{"l<l  ^^hipments  is  interesting,  ami  nii«ht  well  lie  studied  by  those 
who  arc  ronterne<l  with  the  evhanse  situation  in  the  present  war.  Hi* 
thesis  that  the  value  <tf  silver  (le(K'nded  on  the  rourse  of  the  exehanRes  l)c- 
twcen  gold  and  silver  countries,  instead  of  the  course  of  the  exihanRes 
de|>cndinR  on  the  values  of  Hold  and  silver,  seems  to  mc  an  absurd  exajJKera- 
tion  of  a  minor  (iualitu,ition  into  a  main  theory.  Mis  doiirine  that  inter- 
national relations  alone  make  the  i>urei\  legal  money,  without  tommfKlity 
basis,  unsatisfactory,  I  do  not  accept.  I  have  <lis«ussed  this  general  topic 
in  my  chapter  on  "l)<Klo-Hones,"  however,  and  may  content  myself  with 
now  referring  to  that  chapter.  It  is  not  true,  as  a  matter  of  fact,  moreover, 
that  the  money- unit  is  no  longer  defined  as  a  quantity  of  metal.  Our  own 
.\mcrican  practice  is  sulVicient  evidence  on  this  |H>int.  Knapp  has  sought 
to  generalize  his  own  interpretation  of  the  history  of  .\ustrian  pai>er  into 
universal  laws  of  money!  I'hat  his  interpretations  meet  authoritative  dis- 
sent in  .\ustria  is  sultii  icntly  evidenced  by  von  Mises'  disc  ussion,  in  his  Thvorir 
da  Glides  (ch.  on  "  Das  (ield  und  der  Staat  "),  and  in  his  llnglish  article 
on  "The  foreign  Ivxihange  Policy  of  the  Aiistro-IIungarian  Hank,"  British 
Ecoiwmk  Journal,  ixcxi.  Tiie  nniji.n  that  the  legal  tender  fundion  is  prior 
to  the  mediimi  of  cm  hange  function  I  regard  us  quite  indefensible.  It  is 
doubtless  true,  in  certain  cases,  that  a  government  may  debase  its  money, 
delining  the  new  debase<l  money  in  terms  of  the  old,  and  that  j)eople  who 
have  debts  to  pay  ma> .  for  a  time,  anept  the  dcbasc-d  money  as  a  mc<lium 
of  e\.  hange.     Itut  the  limit  of  this  is  re.u  lied  uiien  the  old  debts  have  been 


i.,u)iumiis  (>/  I'.ntcr prise,  p.  .'s; 


il 


THE   FUNCTIONS  OF  MONF.Y 


435 


from  other  goods  as  a  matter  of  degree,  does  not  erect  an 
absolute  difference  of  kind. 

Under  a  smoothly  working  monetary  system,  where  all 
forms  of  money  are  kept  at  a  parity  by  constant  and  ready 
redemption,  and  where  people  have  no  doubt  that  this  re- 
demi)tion  will  occur,  the  legal  tender  quality  which  attaches 
to  part  of  the  money  is  a  matter  of  no  consequence.    It 
adds  nothing  to  the  value  of  the  money.    In  times  of  stress 
the  legal  tender  quaUty  may  be  a  source  of  a  considerable 
temporar>'  value.    This  is  especially  likely  to  be  true  of  an 
mconverUble  money.   The  legal  tender  quality  of  the  Green- 
backs led  to  a  very  considerable  fall  in  the  gold  premium 
m  the  Panic  of  1873.    I  have  mentioned  this  point  in  the 
chapter  on  "Dodo-Bones,"  where  part  of  this  discussion 
has  been  anticipatcxi.    In  general,  the  legal  tender  quaUty 

paid.  Unless  other  factors  (not  ncct-ssarily  rt-dempUon),  then  come  in  to 
sustain  the  value,  the  value  will  sink,  to  a  level  comn;;nsurate  with  the 
debusemen  .  The  va  ue  would  Kenerully  sink  to  a  considerable  degr«  ij 
any  case,  .f  only  the  leRul  factors  work«l  to  sustain  it.  I  have  S^Vl" 
th.s  m  the  chapter  ..n  "  I  >.Kl.>.Bones,-  supra.  It  was  only  bv  Wn«  aTaUbte 
object,  and  commonly  onl>-  bj.  kin«  a  medium  of  exchanKJ,  thuUhe  money 
could  have  l>etom  a  means  „f  legal  .juittance  in  the  f.rst  place.  Menwould 
not  have  .ruule  contracts  in  terms  of  it,  otherwise.  And  men  would  ce«e 
makmK  contracts  jn  .t  as  s,«.n  us  it  (or  other  things  lied  to  it  in  value)  ceased 
to  '  e  an  acceptable  medium  of  exchansc. 

Knapp  tm.ls  a  gixKl  many  phenomena  in  the  hisloo'  of  money  for  which 
tk-  Muantuy  thcH.ry.  ami  the  metallist  theory,  can  giv?no  evpStl  iS 
has  an  excee.  mKly  ,HK,r  o.xn.on  of  Ixjth  theories,  and  makes  many  tellinR 
pomts  agamst  both.  In  so  far  as  his  d.Ktrine  asserts  that  the  phenomelS 
of  money  are  matters  of  social  organization.  ,«ychological  in  milure  I  S 
myself  .n  harmony  with  it.  My  dissc-nt  comes  when  he  seeks  to  er^ct  uS 
abs  ractums  of  the  jurist  into  a  complete  social  philosophy!   I^w  is  only  a 

rl'il  vMr**'""  "^,'"'^'  'T'f^''-  *"*^  •^'^""""''^  ^^•"^•••''  ^Wle  influenced 
by  ItKal  values,  are  far  from  lH.-ing  explaine.1  when  legal  factors  only  are 

Uon  with  the  value  of  money  than  in  connecUon  with  other  values,  but 
they  do  not  dommatc  the  value  of  money. 

i„;'*iTi,'!!i^""°'^  literature  on  money  (e.  g.,  Fr.  Bendixscn.  CHd  und  Kapi- 
a  fair  chance  that  \mcncan  students  may  have  to  read  his  book  if  they 
be  well  for  Germany  if  this  is  not  the  case! 


436 


TIIK  \\\.Vr.  OF  MON'EY 


may  be  rerognizwl  us  a  fattDf  in  sustaining  the  value  of 
moni\ .  if  a>  a  nmseiiui-nce  of  this  (juality  men  take  the 
mi>ney  when  the)  would  not  othenvise  take  it,  or  take  it  <»n 
terms  which  they  would  otherwise  not  agree  to.  Where, 
however,  the  money  is  mone>  which  the>'  are  glad  to  get  in 
any  case,  the  legal  tender  quality  is  a  matter  of  suiK-reroga- 

tion. 

The  standard  of  deferred  payments  function,  as  distin- 
guished from  the  legal  tender  function  and  the  medium  of 
exchange  function,  does  not  add  to  the  value  of  money. 
Of  course,  if  the  standard  of  deferred  payments  is  actually 
used  in  making  the  deferred  pa>Tnent,  then  it  finally  be- 
come>  assimilatiMl  to  the  other  two  functions.    But  it  is 
quite  ijossible  to  divorce  them  completely.    Suppose,  for 
exami)le,  that  the  standard  named  in  a  contract  in  the 
Greenback  Perio<l  was  gold,  but  that  payment  was  made  in 
Greenbacks  at  the  market  ratio.     Or,  suppose  that  the 
standard  of  deferred  payments  shoulil  be  a  composite  of 
commodities,  the  tabular  standard,  with  the  understanding 
that  the  index  number  on  the  day  of  payment  should  de- 
termine the  amount  of  money  to  be  paid.    In  neither  of 
these  cases  does  the  standard  of  deferred  pay-ments  function 
supply  any  reason  for  an  increase  in  the  value  of  the  thing 
which  serves  as  the  standard. 

In  general,  the  standard  of  deferred  payments  and  the 
measure  of  value  functions  do  not,  per  sc,  add  to  the  value 
of  money.  The  legal  tender  function  may  or  may  not  do 
so.  The  medium  of  exchange  function,  the  store  of  value 
function,  the  reserve  for  credit  function,  and  the  bearer  of 
options  function,  normally  do  occasion  an  added^  value 
which  is  to  be  attributed  to  money,  either  as  a  capital  in- 
crement, or  as  a  rental. 
The  question  remains,  however,  as  to  the  relation  of  the 

rental  value,  and  the  capital  value,  of  money.    This  ques- 


TIIF    FUNCTIOVS  OF   MOVEY 


4?  7 


tion  IS  not  easy  to  answer.    As  I  have  already  shown,  in 
the  chapter  on  "Capitali/ation"  and  elsewhere,  various 
omphcations  prtsinl  themselves  in  the  case  of  money. 
(0  In  the  case  of  money,  the  rental,  and  the  pri«ailinK 
rate  of  mterc-st  at  whi.h  rentals  are  .liscounted  to  make  a 
capital  value,  are  not  independent  variables,  but  tend  to 
v^!lry  together.    Thus,  whereas  increase,!  rentals  would  in 
the  case  of  most  income- iK-arers  tend  to  give  a  higher  capital 
value,  this  IS  ofTset,  in  the  case  of  money,  by  the  fact  that 
rentals  are  subject  to  a  higher  discount.    (2)  In  the  case 
of  mcomc-bearers  generally,  the  magnitude  of  the  income, 
or  rental,  is  causally  prior  to  the  capital  value.    The  capital 
value,  in  our  illustration  of  the  candle,  the  disk  and  the 
shadow  on  the  wall,  is  the  shadow,  while  the  rental  is  the 
disk.    This  IS  the  general  relation  in.sisted  upon  by  the 
Bohm-Bawerk-Fetter-Fisher  Une  of  capital  and  interest 
theory.    Pnxluctivity  theories  of  caF)ital  have  been  criti- 
ased  on  the  ground  that  capital  value  is  not  producUve,  that 
only  concrete  capital-instruments  are  productive,  and  that 
they  pnKluce,  not  value,  but  goods,  that  these  goods  receive 
value  from  the  market,  which  is  reflectc>d  back,  but  dis- 
counted, to  the  capital  instruments  which  produced  them 
so  that,  in  value-causation  the  line  of  causation  is  precisely 
the  reverse  of  the  line  of  technological  causaUon.    Capital 
instruments  produce  consumption  gooils.  but  the  value  of 
the  consumption  goods  is  the  cause  of  the  value  of  the 
capital  instruments.    In  the  case  of  money,  however,  this 
IS  not  true.    It  is  the  value  of  the  money,  the  capital  value, 
which  does  the  work  that  makes  a  rental  value.    The  value 
of  the  money  is  a  precondition  of  the  money-funcUon.    So 
far  as  money  is  concerned,  both  "productivity  theories" 
and  "use  theories"  seem  vindicated.     There  is  a  "use." 
an  "enduring  use"  in  addiUon  to  the  "uses."  '    (j)  The 
•C/.  BOhm-Bawerk'!.  CapUd  a,ul  InkresI,  pasum,  particularly  his  .li. 


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438 


THE   VALUE  OF  MONEY 


F! 


^'1 


capitalization  theory,  as  hitherto  formulated,  assumes 
money  and  a  value  of  money.  It  is  a  part  of  the  general 
body  of  price  theory  for  which  this  assumption  has  been 
shown  to  be  needed. 

With  reference  to  the  second,  at  least  of  these  points, 
however,  it  has  been  shown  that  money  is  not  unique. 
Diamonds,  and  all  other  goods  which  have  as  part  of  their 
function  the  conspicuous  display  of  wealth,  likewise  per- 
form this  function  because  they  have  value.    This  gives 
them  an  additional  value.    Diamonds  are  bought  for  this 
purpose,  when  they  would  not  otherwise  be  bought,  or  when 
they  would  not  otherwise  be  bought  in  such  quantity.   This 
additional  value  makes  diamonds  still  more  effective  as  a 
means  of  displaying  wealth,  with  a  further  increment  in 
their  value,  etc.    We  seem,  here,  to  have  an  endless,  and 
vicious,  circle  in  value  causation,  the  value  mounting  in- 
definitely, building  upon  itself,  a  sort  of  "pyramiding" 
process.     But  the  limitation  comes  from  several  angles. 
In  the  first  place,  as  diamonds  rise  in  value,  from  whatever 
cause,  a  smaller  and  smaller  number  of  diamonds  is  required 
to  display  a  given  amount  of  wealth!    The  increase  in  the 
value  makes  each  diamond  so  much  more  effective  for  the 
purpose  in  hand  that  it  tends  to  cut  under  the  cause  of  the 
increase.    These  two  tendencies  come  into  some  sort  of 
equilibrium.    I  suppose  that  by  making  strict  enough  as- 
siunptions,  and  limiting  the  problem  rigidly,  it  would  be  pos- 
sible for  the  mathematician  to  work  out  a  formula  for  this 
equilibrium,  letting  the  increment  in  value  grow  feebler  with 
each  rebound,  till  at  last  it  is  dissipated  in  infinitesimals. 
In  the  second  place,  diamonds  are  not  alone  in  performing 
this  service.   They  must  compete  with  other  precious  stones, 
with  the  precious  metals,  with  limousines  and  Turkish  rugs, 

cussion  of  Heriuuun,  for  an  exiiosition  and  criticism  of  the  "use"  tiicory  of 
interest. 


THE  FUNCTIONS  OF  MONEY 


439 


with  servants  and  livery,  with  houses  and  lots  in  restricted 
neighborhoods,  with  opera  boxes  and  memberships  in  clubs 
which  confer  prestige,  with  a  very  wide  range  of  goods,  for 
the  detailed  discussion  of  which  I  would  refer  again  to  Veb- 
len's  Theory  of  the  Leisure  Class.  The  differential  advantage 
of  diamonds,  when  it  is  borne  in  mind  that  the  conspicuous 
display  of  wealth  is  not  the  only  purpose,  as  a  rule,  for  which 
any  of  these  things  are  bought,  that  the  concrete  diamond, 
or  other  good  bought,  is  a  bundle  of  valuable  services,*  of 
which  the  displaying  of  wealth  is  only  one,  is  not,  neces- 
sarily very  great.  For  many  people,  other  forms  of  wealth 
do  better.  And,  as  a  rule,  diamonds  would  not  perform  that 
service  satisfactorily  alone.  A  large  number  of  diamonds, 
without  proper  "setting,"  in  clothing,  servants,  house, 
opera  box,  etc.,  would  excite  ridicule,  and  fail  -  in  their 
purpose  of  gaining  social  prestige.  They  must  be  part  of  a 
complex  of  goods  of  the  same  sort,  to  accomplish  their 
purpose. 

Now  it  is  the  differential  advantage  of  diamonds  which 
makes  possible  the  extra  value,  in  this  use.  If  all  wealth 
were  equally  serviceable  in  conspicuous  display,  if  cattle 
and  barns  and  shares  in  a  coal  mine  or  slaughter-house  or 
glue  factory  could  display  themselves  as  well  as  diamonds 
can,  and  if  possession  of  these  things  conferred  prestige 
as  much  as  possession  of  diamonds  does,  this  differential 
advantage  of  diamonds  would  disappear,  and  with  it  all 
extra  value  from  that  cause.  Diamonds  are  members  of  a 
class  of  goods,  a  restricted,  but  still  large  class,  which  possess 
this  advantage.  We  may  apply  the  old  Ricardian  rent 
analysis  here,  arranging  goods  in  a  series  from  the  stand- 
point of  their  capacity  to  perform  this  additional  service. 


» Cf.  Clark,  J.  B.,  The  Distrihution  of  Wealth,  pp.  210-245. 
-  This  is  not  necessarily  true  among  Asiatics,  or  on  the  East  Side  in  New 
York  City. 


440 


THE  VALUE   OF  MONEY 


'■ 


u 


It 

II 


Bread  would,  for  the  purpose  in  hand,  be  a  "no-rent" 
good.  Ford  automobiles  are  probably  nearly  no-rent  goods 
now!  That  the  differential  factor  is  a  cause  of  value  in 
land,  as  the  Ricardian  doctrine  seems  to  hold,  is  not,  I 
think,  true.  If  all  land  were  of  equal  quality,  and  of  equal 
accessibility  to  the  market,  all  land  would  still  bear  a  rent, 
if  it  produced  goods  which  had  value,  and  if  the  land  were 
suflficiently  restricted  in  quantity. '  But  here  is  a  case  where 
the  differential  factor  is  an  actual  cause  of  value.  If  all 
wealth  were  equally  effective  in  displaying  itself,  no  form 
of  wealth  could  gain  in  value  as  a  means  of  display. 

This  proposition  calls  for  one  important  qualification. 
The  fact  that  wealth,  in  general,  confers  prestige  is,  un- 
doubtedly, a  source  of  stimulus  in  wealth  creation  and 
acquisition,  and  a  big  source  of  the  value  -  of  total  wealth. 
It  is  probable,  however,  that  it  is  so  great  a  stimulus  to 
production  that  it  defeats  itself  so  far  as  the  values  of  units 
of  goods  are  concerned.  It  stimulates  production,  which 
reduces  the  marginal  values  that  arise  from  other  causes. 
Thus,  while  a  source  of  additional  value  to  the  aggregate  of 
wealth,  it  probably  reduces  the  values  of  given  items. 

I  have  dwelt  at  length  on  the  case  of  diamonds,  because 
principles  applying  there  will  give  us  important  clues  to 
the  case  of  the  value  of  money. 

Money,  by  being  valuable,  is  so  far  equipped  to  perform 
the  money  service.  But  its  differential  advantage  over 
other  valuable  things  comes  from  its  superior  saleability. 
Its  original  value  comes  from  non-monetary  causes,  and 

'  The  adherent  of  the  Ricardian  analysis  who  would  deny  this  may  fight 
it  out  with  Clark,  Fetter,  and  A.  S.  Johnson! 

-  A  friendly  critic^with  a  radically  different  theoretical  point  of  view — 
feels  that  I  am  here  playing  fast  and  loose  with  thu  word,  "value,"  meaning 
sometimes  "total  utility,"  sometimes  "marginal  utility,"  sometimes  "rela- 
tive marginal  utility."  and  sometimes  "price."  I  n€ver  mean  any  of  these 
things  by  "value,"  when  used  without  qualification,  in  this  book.  I  mean 
always  social  economic  value,  conceived  of  as  absolute. 


THE  FUNCTIONS  OF  MONEY 


441 


has  been  sufficiently  explained  in  the  chapter  on  "Dodo- 
Bones"  and  in  the  chapter  on  the  "Origin  of  Money." 
The  extra  value  which  comes  from  the  money  functions 
rests  chiefly  in  its  superior  saleability.  Saleability  is  itself 
a  cause  of  additional  value.  But  here  again  we  rnay  ar- 
range goods  in  a  series,  starting  with  the  least  saleable,  and 
ending  in  m.oney.  Money  has  an  advantage,  but  its  ad- 
vantage is  not  absolute.  Under  a  system  of  free  coinage, 
gold  bullion  is  virtually  on  a  par  with  coin,  and  even  with- 
out free  coinage,  bullion  is  for  many  purposes  as  good,  and 
for  foreign  exchange  may  be  better.  Modem  credit,  more- 
over, as  has  been  indicated  before,  tends  to  add  to  the 
saleability  of  all  goods,  and  so  to  lessen  the  differential  ad- 
vantage of  money. 

Here,  again  we  may  see  the  principle  that  the  extra 
value  that  comes  from  the  differential  advantage  tends  to 
limit  itself.  As  the  money-use  adds  to  the  value  of  money, 
a  smaller  amount  of  money  is  required  to  do  the  money 
work,  and  hence  the  source  of  the  increment  of  value  is 
cut  under.  This  principle  will  partly  explain  why  the 
rental  of  money  cannot  be  capitalized  in  the  same  way  that 
the  rental  of  land  can  be.  Increasing  the  capital  value  of 
land  is  not  the  same  j,s  increasing  the  productive  power  of 
land.  But  increasirig  the  capital  value  of  money  does 
mean  an  addition  to  the  power  of  a  dollar  to  do  money 
work.  It  tends,  moreover,  to  lessen  the  work  that  there 
is  for  money  to  do,  both  by  reducing  the  total  amount  of 
trading,  and  by  increasing  the  incentive  to  the  use  of  sub- 
stitutes for  money.  Only  a  part  of  the  value  of  the  services 
of  money,  thus,  can  be  added  to  the  capital  value  of  money. 
There  is  a  further  point  which  is  important,  as  differentiat- 
ing money  from  diamonds:  much  more  of  the  value  of  the 
services  resting  on  the  value  of  diamonds  can  be  added  to 
the  capital  value  of  the  diamonds  than  is  the  case  with 


442 


THE  VALUE  OF  MONEY 


V    t 


money.  The  reason  is  that  diamonds  may  give  forth  a 
continuous  flow,  in  the  same  hands,  of  the  service  of  con- 
spicuous (h'splay  of  wealth.  Money,  however,  can  perform 
most  of  its  services  for  a  given  owner  atily  once.  For  a 
given  owner,  it  can  serve  only  once  as  a  medium  of  ex- 
change. For  one  owner,  it  can  serve  only  once  as  legal 
tender  for  debts.  It  can  serve  indefinitely  as  a  store  of 
value,  or  as  "bearer  of  options."  In  these  cases,  however, 
the  relation  between  value  of  service  and  capital  value  does 
work  out  in  accordance  with  the  capitalization  theory. 
The  money  this  held  brings  in  no  money  income.  It  is 
held  thus  only  if  the  services  which  it  performs  are  equiva- 
lent to  the  income  which  would  come  if  it  were  alienated, 
and  something  which  would  bring  in  a  money  income  were 
purchased  in  its  place.  Money  may  have  added  to  its 
capital  value  the  value  that  is  created  by  one  marginal  ex- 
change, but  the  whole  series  of  values  which  a  dollar  may 
create  in  exchanges  cannot  be  capitalized,  if  only  because 
the  same  owner  cannot  get  them  all.  This  holds  strictly 
true  only  so  long  as  no  credit  arrangements  exist.  If 
loans  of  money  can  be  made,  then  the  lender  can  take  toll 
on  successive  exchanges,  and  get  an  income  which  may  be 
capitalized  in  part,  subject  to  the  limitation  already  dis- 
cussed, that  increasing  capital  value  of  money  cuts  into  the 
rental,  and  so,  in  large  measure,  destroys  its  own  source. 

Where  money  is  not  freely  coined,  there  may  be  an  in- 
crement, growing  out  of  the  capitalization  of  the  money- 
services,  in  the  value  of  the  coin.  The  coin  may  be  worth 
more  than  the  uncoined  bullion.  This  need  not  be  true. 
If  the  amount  of  money  work  to  be  done  is  not  increasing, 
it  will  not  be  true,  unless  the  value  of  the  bullion  declines, 
and  need  not  be  true  then.  But  an  agio  on  coined  over  un- 
coined metal  is  quite  possible,  and  has  frequently  occurred. 
Such  an  agio  has  limits,  however.     In  the  first  place,  the 


THE   FUNCTIONS  OF  MONEY 


443 


bullion  may  be  used  as  a  substitute  for  coin,  so  lessening  the 
amount  of  work  there  is  for  coin  to  do,  and  lessening  the 
source  of  the  agio.  Bullion  would  tend  to  rise  in  value 
from  being  thus  employed,  and  coined  money  would  lose 
in  value  from  a  reduction  in  the  services  it  performed. 
Further,  anything  which  has  more  than  ordinary  saleability 
may  be  used  as  a  substitute,  in  one  or  another  capacity. 
Again,  the  agio,  if  it  appeared  in  a  country  where  men  are 
accustomed  to  thinking  about  money,  might  well  arouse 
distrust,  lessen  the  sc  pe  of  the  coin  still  further,  and  so  cut 
into  its  own  source.  But  such  agios  have  appeared,  and 
while  a  pure  case,  where  the  sole  source  of  the  agio  is  the 
values  created  in  the  money-functioning,  is  hard  to  find,  I 
think  it  is  not  to  be  questioned  that  cases  where  this  is  part 
of  the  explanation  have  arisen.  I  should  be  disposed  to 
find  part  of  the  explanation  of  the  rise  of  the  rupee  in  India 
after  the  closing  of  the  mints  in  1893  in  this  factor.  There 
seems  to  be  evidence,  however,  that  Laughlin  is  right,  in 
part,  in  ascribing  the  rise  to  an  expectation  of  the  adop- 
tion of  the  gold  standard.* 
Modem  money,  in  general,  however,  rests  on  a  system  of 

*  I  have  been  unable  to  satisfy  myself  that  anyone  has  made  a  sufficiently 
thorough  study  of  the  course  of  the  gold  premium  on  the  Ru[)ee,  the  agio 
of  the  Rupee  over  its  bullion  content,  or  the  course  of  prices  in  India,  during 
the  period  from  1893  to  1898,  to  justify  confident  statements  as  to  the  com- 
parative strength  of  different  elements  in  the  explanation  of  that  history. 
Kemmerer  states  {Money  and  Credit  Instruments,  p.  38)  that  he  can  find  no 
evidence  at  all  to  support  Laughlin's  view  of  the  matter.  (See  Laughlin, 
Principles  of  .\foney,  pp.  524  et  seq.)  J.  M.  Keynes,  however,  in  his  Indian 
Currency  and  Finance,  p.  5,  says:  "The  Committee  of  1892  did  not  commit 
themselves;  but  the  system  which  their  recommendations  established  was 
generally  supposed  [Italics  mine.)  to  be  transitional  and  a  first  step  toward 
the  introduction  of  gold  [italics  mine.]."  In  the  arrangements  of  1893, 
moreover,  a  ratio  between  English  gold  and  the  Rupee  was  established,  of 
i6d.  to  the  Rupee,  even  though  provisions  for  holding  the  Rupee  to  this 
ratio  were  left  till  the  establishment  of  the  "gold  exchange  standard," 
several  ye,ars  later.  KevTies,  on  p.  3,  discusses  the  arguments  of  the 
silver  party  against  the  introduction  of  gold,  which  is  further  evidence 
that  the  action  of  the  Committee  was  understood  as  looking  toward  a  gold 


444 


THE  VALUE  OF  MONEY 


•I  ' 
'-  i 

n\ 

I  i 

-'  ?  t 


free,  even  where  not  strictly  gratuitous,  coinage.  Coined 
metal  thus  rarely  gets,  save  to  a  limited  extent  or  tempo- 
rarily, an  agio  over  uncoined  bullion.  Uncoined  bullion 
is  acceptable  in  a  host  of  places  where  coin  would  other- 
wise be  used,  particularly  in  reserves  for  credit  instruments. 
Bullion  is  even  superior  in  international  trade  as  a  medium 
of  exchange.  Credit  paper  (particularly  bills  of  exchange), 
is  superior  to  both  in  international  exchi.nge,  as  a  medium 
of  exchange,  because  of  various  reasons  of  economy.  Such 
paper  is  even  used  in  reserves  in  many  places,  particularly 
by  the  Austro-Hungarian  Bank. 

The  fact  of  free  coinage  means,  substantially,  that  the 
state  has  made  the  money  fomi  a  free  good.  How  much 
value  is  thereby  destroyed  we  may  best  see  if  we  ask  pre- 
cisely how  much  the  money  form  could  mean  at  the  limit. 
Initially,  the  money  form  means  simply  the  certification  of 
weight  and  fineness  by  a  trusted  authority.  It  saves, 
therefore,  the  delay  and  expense  of  testing  the  weight  and 
fineness  by  assay,  etc.  It  saves  the  trouble  and  delay  of 
subdivision  of  a  formless  metal.  It  averts  many  difficul- 
ties. For  small  retail  transactions,  indeed  for  retail  transac- 
tions in  general,  the  conveniences  of  coined  over  uncoined 
metal  are  very  great.  Small  transactions  do  not  justify 
the  trouble  and  expense  of  assaying  and  weighing  and  sub- 
dividing gold  1     In  a  country,  therefore,  where  the  bulk  of 

standard.  There  is  snmc  evidence  at  least  for  Laughlin's  view.  That  his 
view  offers  a  complete  explanation,  I  think  unlikely. 

Kemmerer's  admirable  Modern  Curreiiry  Reforms  (Macmillan,  1916),  is 
at  hand  while  the  proof  sheets  arc  being  revised.  It  is  interesting  to  note 
that  he  finds  the  statistical  evidence  regarding  Indian  prices,  trade,  etc., 
far  too  scanty  to  justify  |K)siti\  e  condusions  as  to  the  causes  governing  the 
course  of  the  rupee.  He  prefers,  rather,  to  rest  the  case  for  the  quantity 
theory  on  a  priori  reasoning  and  statistics  for  the  United  .States.  Loc. 
til.,  pp.  70-71.  In  the  chapter  on  "Dodo-Bones,"  I  have  suggested  that 
India  might  come  nearer  than  other  countries  to  actualizing  the  assump- 
tions of  the  quantity  theorj'.  On  Kemmerer's  showing,  however,  it  appears 
to  be  a  liability,  rather  than  an  asset! 


W 


THE   FUNCTIONS  Ut    MONEY 


445 


the  money  work  is  in  etTccting  small  transactions,  we  might 
expect  a  considerable  agio  for  coined  over  uncoined  metal. 
This  would  be  especially  true  if  that  country  had  few  facil- 
ities for  credit  substitutes  for  the  coin,  particularly  for  small 
transactions.  In  a  country  like  the  United  States,  however, 
where  checks  are  often  drawn  for  amounts  less  than  a  dollar, 
and  where  the  bulk  of  the  gold,  or  standard  money,  is  to  be 
found,  not  in  circulation  but  in  reserves,  one  need  not  antici- 
pate that  the  medium  of  e.xchange  function  would  give  a 
big  agio  to  gold  coin,  even  if  free  coinage  ceased.  So  long 
as  coinage  means  merely  a  certification  of  weight  and  fine- 
ness, this  conclusion  will  hold.  For  purposes  of  large 
transactions,  the  item  of  weighing  and  assaying  would  not 
be  serious.  Indeed,  American  banks  are  accustomed  to 
weigh  even  gold  cum,  in  quantity.  It  goes  by  weight, 
rather  than  by  tale,  and  if  light-weight,  it  counts  for  less 
than  its  nominal  value.  The  writer  knows  a  bank  which 
has  a  considerable  store  of  light-weight  gold  coin  that  has 
been  in  its  vaults  for  over  twenty  years.  Such  coin  may 
be  counted  at  par  in  reports  by  the  bank  to  the  Govern- 
ment.* It  might  be  paid  out  through  the  window  to  cus- 
tomers, who  would  not  weigh  it,  in  case  of  a  "run"  on  the 
bank.  But  it  carmot  be  used  in  dealings  with  other  banks 
without  loss. 

Does  the  legal  tender  aspect  of  coin  count  for  more? 
Under  a  smoothly  working  system  of  free  coinage,  where 
moreover,  all  forms  of  money  are  kept  at  a  parity  by  ready 
redemption,  we  have  seen  that  the  legal  tender  feature 
makes  no  difference.  Would  it  make  a  difference  where 
coinage  is  restricted?  If  we  assume  that  the  use  of  checks 
for  small  payments,  and  the  use  of  bullion  in  reserves,  in 

'  This  is  a  national  bank.  In  the  same  community,  the  writer  asked  the 
president  of  a  State  bank  about  his  gold  reserve,  and  was  told  that  light- 
weight gold  coin  could  not  be  used,  since  the  State  bank  examiner  made  a 
practice  of  weighing  the  gold  of  State  banks. 


446 


THE  VALUE  OF  MONEY 


its 
lli 


a  given  case,  prevents  the  existence  of  an  agio  growing 
out  of  the  other  functions  of  money,  I  think  it  clear  that 
the  legal  tender  feature  alone  will  not  create  one.  But 
suppose  that  there  is  an  agio  from  other  causes,  will  not 
the  legal  tender  aspect  of  money  tend  to  increase  it?  Will 
not  men  demand  coin,  which  bears  an  agio,  rather  than 
bullion,  when  they  have  the  right  to  demand  cither?  And 
will  not  the  agio  then,  in  a  way,  grow  out  of  itself,  a  bigger 
agio  appearing,  because  an  agio  has  already  appeared? 
It  does  not  seem  to  me  that  this  need  follow.  If  there  be 
an  agio,  then  creditors  will  demand  either  coin,  or  bullion 
on  a  different  basis  from  coin.  But  so  long  as  they  get  the 
benefit  of  the  agio,  either  in  the  form  of  coin,  or  of  a  larger 
amount  of  bullion,  particular  circumstances,  rather  than  a 
general  rule,  will  determine  which  they  will  demand.  The 
banker  might  well  prefer  bullion.  The  international 
banker  would  prefer  bullion.  The  man  who  wishes  money 
for  retail  transactions  will  take  coin.  Men  will  use  the 
legal  tender  quality  of  money  as  a  means  of  getting  the 
benefit  of  what  agio  there  is  (though  contract  right,  where 
the  contract  calls  for  coin,  would  accomplish  all  that  a 
legal  tender  law  would  accomplish),  but  whether  they  take 
23.22  grains  of  coined  gold,  or  25.5  grains  of  gold  bullion, 
will  depend  on  which  they  prefer  in  the  circumstances.  I 
do  not  see  that  the  legal  tender  feature  adds  anything  to  the 
case  of  restricted  coinage  that  it  does  not  add  to  the  case  of 
free  coinage.'  In  either  case,  there  will  be  temporary 
emergencies,  when  panics  arise,  when  legal  tender  money 
gets  an  agio  over  any  possible  substitute.  Solvency  may 
depend  on  it.  This  might  arise  under  free  coinage,  if  the 
panic  were  acute,  and  if  settlements  had  to  be  made  imme- 

'  Legal  tender  can  add  lo  value  of  money  onl>'  when  it  loniers  an  option 
on  the  debtor.  In  the  case  discussed,  it  is  the  creditor  who  has  the  option. 
But  options  are  not  necessarily  valuable. 


THE   FUNCTIONS  OF  MONEY 


447 


diately.  But  as  long  as  there  is  time  for  men  to  work 
things  out,  I  should  not  expect  the  legal  tender  feature, 
[>cr  sc,  to  add  to  the  agio  of  coined  metal  even  under  re- 
stricted coinage. 

In  general,  the  possibility  of  an  agio  for  coined  metal,  un- 
der restricted  coinage,  rests  on  the  extent  to  which  coin  has  a 
unique  function.  In  so  far  as  substitution  is  possible,  there  is 
no  room  for  an  agio.  For  many  purposes,  bullion  may  be 
substituted.  To  the  extent  that  credit  is  developed,  and  is 
flexible,  various  other  substitutes  are  possible.  To  the  extent 
that  barter  can  be  used,  still  other  substitutes  are  possible. 

Among  an  ignorant  people,  little  accustomed  to  develop- 
ing new  expedients,  having  an  economic  life  that  is  not 
flexible,  having  an  economy  based  on  petty  economic  units, 
having  little  development  of  credit,  accustomed  to  the  use 
of  money  in  most  transactions,  money  might  well  be,  in 
many  connections,  highly  important  if  not  indispensable. 
In  England,  before  the  War,  where  no  bank-notes  under 
five  pounds  were  in  circulation,  and  where  small  checks 
were  little  used,  an  agio  on  coin  might  appear  if  coin  got 
so  scarce  as  to  be  inadequate  for  retail  trade,  but  for  bank 
reserves  bullion  would  have  served  virtually  as  well  as 
coin,  and  with  the  stock  of  coin  she  had  at  the  time  England 
could  have  gone  on  for  a  long  time  indeed  with  no  more 
agio  than  just  enough  to  prevent  the  melting  down  of  the 
coin.  In  the  United  States,  where  checks  can  be  used  for 
ver>'  small  transactions,  and  where  a  high  percentage  (very 
conservatively  estimated  by  Kinley  at  from  50  to  60%) 
of  retail  business  is  done  with  checks,  the  agio  on  coins  of  a 
dollar  or  over  growing  out  of  retail  trade  might  be  expected 
to  be  very  slight.  On  the  other  hand,  the  legal  require- 
ments for  reserves  in  specified  types '  of  money  might,  in 

■  As  Davenport  has  pointed  out,  money  is  really  moneys — there  b  a 

luLTurchy.    C/.  Economics  of  Enterprise,  pp.  256-259. 


448 


Tin;   VAM'K   (»F    MONEY 


time,  lead  to  sonii-  agio.  I  do  not  tiunlc  that  the  reserve 
func  tion  ill  Kngland  woiiki  ever  do  so.  If  we  rould  eombine 
our  use  of  rheeks  in  retail  trade  with  Kngland's  absence  of 
legal  reserve  reciuirenu-nts,  I  should  think  that  the  agit) 
would  have  little  thance  indeed  of  growing  great  I  If  to 
this  could  be  added  Canada's  extensive  use  of  small  elastic 
bank-notes,  the  chance  would  be  still  less.  If  bank-notes 
of  one  dollar  ould  be  issued,  the  agio  would  be  less  still. 

It  is  in  the  case  of  coins  of  very  small  denomination  that 
the  agio  might  ai)j)ear  most  readily.  Such  coins,  if  limitetl 
in  amount,  and  if  given  the  usual  restricted  legal  tender,* 
do  not  need  redemption  to  circulate  at  face  value,  even 
when  maile  of  baser  metals.  It  is  quite  thinkable  that 
such  coins  shouKl.  even  when  redeemable,  circulate  at  an 
agio  over  the  redemption  money.  In  small  retail  transac- 
tions the  need  for  money  to  do  business  is  most  imperative. 
Even  here,  however,  there  is  large  flexibility.  The  present 
writer,  during  the  period  of  money  stringency  in  the  Panic 
of  1907,  made  much  larger  use  of  checks  in  very  small  pay- 
ments than  was  his  usual  practice,  and  the  same  was  true 
of  various  of  his  acquaintances. 

I  think  that  the  quantity  theorist,  with  his  doctrine  of 
an  unlimited  agio  through  the  restriction  of  coinage  pro- 
portionate to  the  restriction,  is  best  understood  if  we  say- 
that  he  has  taken  an  exaggerated  estimate  of  the  imperative- 
ness of  the  need  for  formed  mone}-  in  the  smallest  retail 


•-I 


'  The  restricted  k'^al  tender  of  small  coins,  where  the  coins  are  limited 
in  amount  to  the  needs  of  retail  trade,  is  virtually  an  unrestricted  lesal 
tender,  in  practice,  an<l  an.ounts,  in  fact,  to  redemption.  The  coins  are 
capable  of  heinK  used  where  larj^e  coins,  of  standard  metal,  would  otherwise 
be  used,  or  where  checks,  redeemable  in  standard  coin,  would  be  used. 
Legal  tender  is  vastly  more  efTe(  tive  with  reference  .0  a  small  part  of  the 
money  system  than  it  would  be  with  the  whole  of  the  money  supply.  The 
same  is  true  uf  the  privilege  uf  iiv,inf;  a  parlituiar  form  of  Tionry  in  payinj? 
taxes.  C/.  W.  C.  Mitchell's  discussion  of  the  "l)emand  Notes,"  History 
of  Greenbacks,  passim. 


ifi' 


THF.   FlINCriON.^   OF   MONEY 


449 


transiittions  as  tjpuiil  of  the  wholi-  situutio  .  i  have  else- 
where shown,  however,  that,  in  sa  far  as  Kinley's  figures 
for  iQCHj  give  us  a  clue,-  the  total  retail  trade  of  the  United 
States  is  less  than  one-elevetith  of  the  total  of  all  transac- 
tions calling  for  the  use  of  money  and  chfdcs.  Of  that  total 
retail  trade,  the  part  in  which  money  is  actually  used  is, 
on  Kinley's  liigh  estimate,  between  40  and  s°Vt'^  and 
the  part  in  which  money  is  imperative  is  much  lower  still. 
Small  retail  transactions  do  not  give  the  ty()e  for  the  jx:- 
cuniar>'  transactions  in  the  United  States!  They  more 
nearly  do  so  in  India,  and  the  possibility  of  agio  is,  doubt- 
less, greater  there.  For  our  larger  transactions,  there  is  an 
almost  indefinite  possibility  of  substitutes  for  coined  money, 
if  profits  can  be  made  by  making  the  substitutions.  Beating 
the  agio  would  be  a  source  of  profits. 

I  repeat  what  was  s;iid  in  the  chapter  on  'Dodo-Bones" 
diflerentiating  this  doctrine  of  the  agio  from  the  quantity 
theory-  doctrine:  (i)  This  d(Ktrine  presupposes  value  for 
the  money  article  from  some  non-monetary  sourer.  It  re- 
lates only  to  a  ditTerential  portion  of  the  value  of  money. 
(2)  This  doctrine  denies  the  law  of  proportionality  even  for 
this  difTerential  portion.  (3)  This  doctrine  is  concerned, 
not  with  the  general  level  of  prices,  but  with  the  absolute 
value  of  money  measured  in  the  ratio  of  coin  to  bullion. 

Under  the  system  of  free  and  gratuitous  coinage,  no  agio 

'cy.  Mitchell's  account,  (//»/(/..  pj).  166-173),  of  the  premium  on  minor 
currency,  during  the  Civil  War.  Pennies  were  used  in  rolls  (jf  jj  ;is  a  sub- 
stitute for  silver  quarters,  which  had  left  the  country  under  (iresham's  Law. 
The  premium  was  due  primarily  to  the  need  for  small  change,  rather  than 
to  bullion  'ontent,  though  the  latter  was  a  factor  even  for  coins  made  of 
baser  metals,  in  1864. 

*(/.  my  artiiie  in  tlie  Aiiiiali\l.  Feb.  7,  i(;i6,  '•The  Ratio  of  Foreign  to 
Domestic  Trade,"  and  the  chapter,  si<pr,i,  on  "The  Quantity  of  Money  and 
the  Volume  iif  Trade." 

'  Kinley's  figures  shuu  a  nuuh  louer  percentaue  of  money  than  this. 
He  is  anxious  not  to  overestimate  the  extent  to  which  checks  are  used, 
however,  and  so  gi\  es  the  figures  of  50  to  OoVo  of  checks  as  a  safe  lower  limit. 


*  '  M 


i\ 


5  ■ 

6  ! 


45° 


THE  VALUE  OF  MONEY 


of  coined  over  .^coined  bullion  is  possible.  Where  small 
brassage  charges  are  made,  as  in  France  (or  as  in  England, 
where  the  interest  lost  during  the  period  of  coinage  is 
charged  to  the  man  who  exchanges  bullion  for  coin  at  the 
Bank  of  England)  there  may  be  an  agio  of  this  amount, 
though  it  often  happens  that  this  agio  disappears,  particu- 
larly in  England.  So  perfectly  is  bullion  a  substitute  for 
coin  in  England,  that  the  Bank  of  England  will  often 
forego  its  privilege  of  taking  the  slight  toll  in  interest,  and 
will  credit  men  depositing  bullion  with  as  much  as  if  they 
had  deposited  coin.  From  what  has  gone  before,  as  to  the 
possibility  of  an  agio,  I  conclude  that  the  United  States, 
England,  Canada,  and  possibly  France,  would  be  unable 
to  make  large  brassage  charges.  If  the  brassage  charge 
were  much  larger  than  the  charges  made  by  reputable  and 
well-known  jewelers  for  ass-._,lng  and  weighing,  etc.,  there 
would  be  a  large  substitution  of  bars  lor  coins,  and  the 
mints  would  have  little  to  do.  However,  it  needs  no  ar- 
guing that  with  free  coinage,  and  either  very  low  or  no 
brassage  charges,  the  value  of  bullion  and  of  coin  will, 
quality  for  quality  and  weight  for  weight,  be  virtually 
identical,  within  a  narrow  range  of  variation. 

What,  then,  shall  we  say  of  the  way  in  which  the  forces 
drawing  gold  from  the  arts  into  money  manifest  tliem- 
selves? 

How  describe  the  equilibrium  between  the  value  of  gold 
as  money  and  the  value  of  gold  in  the  arts?  How  construct 
intersecting  cur\'es,  presenting  a  marginal  equilibrium? 
The  problem  is  baffling,  and  I  frankly  confess  that  what  I 
shall  have  to  say  does  not  satisfy  me.  I  hope  that  some 
critic  may  solve  the  problem  better.  I  can  point  out  the 
difficulties  of  the  situation,  and  can  indicate  reasons  why 
the  sort  of  solution  which  the  economist's  training  in  mar- 
ginal analysis  leads  him  to  desire  are  not  easily  found.    But 


THE   FUNCTIONS  OF  MONEY 


451 


■li 
I 


I  fear  that  I  shall  fail  to  satisfy  the  demand  for  an  applica- 
tion of  curves  to  the  problem! 

The  first  difficulty  is  that  we  are  barred  from  the  use 
of  our  yardstick.    Money  is  the  measure  of  all  things  in 
economic  theory— except  money  and  gold  bullion!     Of 
course  there  are  economic  values  other  than  those  of  gold 
which  do  not  actually  come  into  the  market,  but  even  there 
we  can  commonly,  by  the  accountant's  methods,  make 
use  of  the  money  measure.    In  very  high  degree,  our  con- 
ventional curves  of  all  sorts  run  in  money  terms,  and  as- 
sume a  fixed  value  of  money.    Clearly  the  money  curve  of 
dmunishing  value  for  gold  would  tell  us  nothing.     The 
value  of  gold  might  sink  as  its  quantity  increased,  but  then 
the  value  of  the  money-unit  would  sink  pari  passu,  and  so 
the  curve,  with  ordinates  expressed  in  numbers  of  dollars 
per  ounce,  would  not  sink.     The  value-curve  of  gold,  ex- 
pressed in  money,  is  a  straight  line,  parallel  to  the  X  axis. 
Possible  substitutes  in  the  form  of  abstract  units  of  value,* 
or  of  composite  units  of  goods,  of  an  assumed  fixed  value, 
will  have  to  be  used  if  anything  is  used,  but  they  are  less 
satisfactory  in  the  application,  and  leave  the  analysis  a  good 
deal  less  realistic. 

If  this  were  all,  the  problem  would  be  easy!  But  there  is 
a  second  difficulty.  We  find  the  factors  requiring  gold  as 
money,  if  summed  up  in  a  curve,  presenting  themselves  as 
a  call  for  the  temporary  rental  of  the  gold.  The  money 
functions  are  performed,  in  general,  not  by  keeping  gold, 
and  getting  an  endless  series  of  uses  from  it,  as  in  the  arts, 
but  by  passing  it  on,  sooner  or  later.  Even  in  the  case  of 
the  reserve  function,  the  bearer  of  options  function,  and 
the  store  of  value  functions,  it  is  not  expected  to  hold  the 
gold  indefinitely— always  there  is  the  anticipation  of  some 
time  when  it  will  be  passed  on  again.  A  curve  for  gold  in 
1  Cf.  Social  Value,  183-184. 


452 


THE   VALUE   OF   MONEY 


t  'i 


the  monetary  emplo.vTnents,  therefore,  would  be  a  cur\'e 
showing   the   diminishing   values   of   rents,   or   particular 
services  rather  than  a  curve  for  capital  values,     'i'he  curve 
for  gold  in  the  arts,  however,  would  be  a  curve  showing 
the  diminishing  capiUil  values  of  units  of  gold,  as  the  supply 
in  the  arts  is  increased.     The  two  curves  do  not  run  in 
common    terms.     But    another    and    more    fundamental 
difficulty.     In  the  case  of  wheat,  we  may  construct  our 
curve  free  from  complications,  in  idea,  at  least.    On  the 
base  line,  we  lay  out  quantities  of  wheat.     For  each  quan- 
tity of  wheat,  we  erect  an  ordinate,  a  sum  of  money,  or  a 
number  of  abstract  units  of  value,  as  the  case  may  be. 
Connecting  these  ordinatcs,  we  have  a  curve,  showing  how 
the  value  (or  the  money-price)  of  wheat  descends  as  the 
quantity  of  wheat  increases.     Given  the  shape  of  the  curve, 
and  given  the  number  of  bushels  of  wheat,  the  marginal 
value  of  the  wheat  is  given.     In  idea,  at  least,  it  does  not 
matter,  for  the  shape  of  the  curve,  whether  the  amount  of 
the  wheat  is  great  or  small,  whether  the  marginal  value  of 
the  wheat  is  low  or  high.    If  there  are  ten  thousand  bushels 
only  in  the  market,  wheat  will  be  worth  $5  per  bushel. 
With  100.000  bushels,  it  is  worth  40c.     The  fact  that  there 
are  100,000  bushels  does  not  lessen  the  magnitudes  on  the 
higher  portions  of  the  curve.     The  nature  of  the  services 
which  wheat  performs  is  not  affected  by  its  value.     This 
is  not  true  of  gold,  either  in  the  arts  or  as  money.     In  the 
arts.  I  have  already  shown  that  one  function  of  gold  is  as 
a  means  of  conspicuously  displaying  wealth.     Gold  is  like 
diamonds  in  this.    Because  gold  is  a  valuable,  it  gets  an 
additional    valuable    service-     This    additional    valuable 
service  enhances  its  value.    The  thing  is  checked,  however, 
before  an  endless  circle  is  created,  by  the  fact  that  as  gold 
rises  in  value  u  smaller  amount  of  gold  will  display  a  given 
amount  of  wealth.    The  value-curve  for  gold  in  the  arts, 


J^n 


THE   FUNCTIONS  OF  MONEY 


453 


therefore,  is  not  a  simple  thing  like  the  curve  for  wheat. 
It  turns  upon  itself,  in  ways  that  I  see  no  graphic  device 
for  presenting.    This  is  even  truer  for  money.    Men  wish 
to  have,  when  they  seek  money,  a  quantum  of  value  in 
highly  saleable  form.'     The  curve  for  the  value  of  the 
services  of  money  presupposes  a  fixed  capital  value  of 
money.    It  is  the  capital  value  of  money  which  does  the 
money  work.    Given  a  value  of  money,  and  given  the 
values  of  goods   wo  may  see  how  much  money  is  required 
to  effect  a  given  exchange  or  perform  some  other  money 
service.    Then,  knowing  how  much  value  will  be  created  by 
each  exchange,  or  other  money  service,  we  may  arrange  the 
ser\ices  in  a  series,  a  scale  of  descending  importance,  and 
get  a  curve.    This  curve  is,  m  fact,  the  curve  which  pre- 
sents itself  in  the  money  market.    There  we  find  a  curve, 
running  in  terms  of  money  itself,  so  much  money  for  the 
use  of  money  for  such  a  length  of  time.    But  this  is  a  curve 
of  demand  for  money  funds,  rather  than  for  gold  as  such. 
The  "supply"  that  corresponds  to  this  "demand"  is,  not 
gold,  but  all  manner  of  credit  instruments,  chiefly  bank- 
deposits,  expressed  in  terms  of  gold.    Such  a  curve  is 
clearly  not  to  be  put  into  equilibrium  with  the  value-curve 
for  gold  in  the  arts,  (i)  because  it  assumes  a  fixed  value  for 
money  (2)  because  it  is  concerned  with  temporary  rentals, 
and  not  capital  values,  and  (3)  because  the  demand  it  ex- 
presses is  not  for  the  use  of  gold  alone. 

We  may  get  some  aid  in  reducing  these  complexities  to 
familiar  terms  if  we  employ  the  device  of  assuming  an 
equilibrium  between  gold  in  money  and  gold  in  the  arts, 
without  trying  to  explain  in  quantitative  terms  how  that 
equilibrium  is  arrived  at,  and  then  see  what  causes  will  lead 
that  equiUbrium  to  shift.    In  getting  the  laws  of  change, 

'  C/.  Carver's  contention  that  "the  demand  for  money  is  a  demand  for 
value.      "Concept  of  an  Economic  Quantity,"  Quart.  Jour,  of  Econ.,  1907. 


454 


THE  VALUE  OF  MONEY 


'  *Vfr-)}'  t 

tt 

iitm£  i 

1 

3^(1 

1 

we  may  get  closer  to  the  causes  of  the  phenomenon  itself. 
The  effort  to  reduce  the  thing  to  precise  mathematical  form 
requires  a  degree  of  simplification  which  seems  to  me  likely 
to  rob  an  answer  of  much  significance. 

Assuming  that  the  equilibrium  is  reached,  we  may  see 
what  factors  would  tend  to  cause  gold  to  go  into  the  money- 
use,  and  what  factors  would  tend  to  draw  gold  into  the  arts 
use.  We  may  also  see  how  these  changes  from  one  side  or 
the  other  would  modify  the  value  of  gold. 

Assimie  that  a  manufacturing  jeweler  has  extr .  demand 
for  his  products.  His  products,  of  course,  are  composites 
of  gold,  labor,  and  other  raw  materials,  etc.,  but  part  of  the 
extra  value  that  comes  to  his  products  attaches  itself  to  the 
gold  that  is  in  them.  He  now  has  an  incentive,  which  was 
lacking  before,  to  melt  down  full  weight  gold  coin  in  his 
possession,  or  to  buy  gold  bars  which  might  otherwise  have 
been  coined.  To  buy  the  gold  bars,  however,  probably 
means  that  he  must  have  accommodation  at  the  bank.  He 
borrows  from  the  bank  the  amount  he  needs,  giving  a  short- 
time  note,  since  he  expects  to  make  up  his  gold  and  market 
it  in  a  fairly  short  time.  The  paper  of  manufacturers  of 
gold  will  commonly  stand  well  in  the  "money  market," 
and  this  is  especially  true  of  those  in  whose  hands  the  gold 
is  not  worked  up  into  such  specialized  forms  that  the  value 
of  the  bullion  is  a  minor  matter.  (I  find  it  necessary  to 
refer  frequently  to  the  money  market,  though  a  full  anal- 
ysis of  money-market  phenomena  caimot  come  till  after 
our  discussion  of  credit.)  If  he  must  borrow  to  get  the 
gold,  then  the  money-rates  will  come  into  comparison  with  the 
profits  he  expects  to  make  from  working  up  the  gold.  This 
will  usually  be  true  even  if  he  melts  down  gold  coin  already 
in  his  possession.  He  might  deposit  that  gold,  and  so 
reduce  his  expenses  at  the  bank,  cither  bujing  back  his  own 
discounted  paper,  or  getting  interest  on  daily  checking 


THE  FUNCTIONS  OF  MONEY 


455 


account.  If  he  has  to  borrow  to  get  the  gold,  he  may  get  it 
either  by  drawing  gold  from  the  bank  directly,  or  by  giving 
a  check  on  the  bank  to  a  bullion  dealer,  which  may  ulti- 
mately lead  to  a  diminution  in  the  bank's  supply  of  gold. 
However  he  gets  the  gold,  there  is  bound  to  be  some  reac- 
tion, (i)  on  the  bank's  supply  of  gold,  (2)  on  the  supply  of 
loanable  funds  in  the  money  market,  and  hence  (3)  on  the 
money-rates  themselves.  If  he  borrows  from  the  money 
market,  he  affects  the  money-rates  directly  (even  though 
probably,  in  a  given  case,  not  noticeably) ;  if  he  melts  down 
coin,  instead  of  depositing  it  (or  paying  it  out  to  others  who 
may  ultimately  deposit  it)  there  tends  also  to  be  less  gold 
in  the  bank's  vaults;  if  he  buys  gold  with  his  own  funds  in 
the  bullion  market,  the  supply  of  current  bullion  for  which 
ihe  banks  also  compete  is  reduced.  In  any  of  these  cases, 
the  banks  have  less  gold  than  would  otherwise  be  the  case. 
The  relation  between  gold  reserves  and  the  supply  of  money- 
funds  has  been  partly  discussed  already.  We  have  seen 
that  there  is  no  proportional  relation,  as  Fisher,  and  other 
quantity  theorists  contend.  Loanable  fimds,  on  a  given 
gold  reserve,  are  highly  elastic.  But  the  elasticity  calls 
for  higher  money-rates,  and  higher  money-rates  tend  to  re- 
duce the  volume  of  trading,  and  check  the  demand.  Bor- 
rowings from  the  money  market  by  workers  in  gold,  there- 
fore, are  much  more  significant  than  borrowings  by  other 
manufacturers  or  merchants,  because  the  latter  are  content 
with  credit  devices,  for  the  most  part,  while  the  workers  in 
gold  withdraw  gold  itself  from  the  money  market.  It  is, 
moreover,  harder  for  the  money  market  to  resist  extra 
demand  from  the  jewelers  than  from  many  other  interests. 
The  assets  of  the  jewelers,  especially  from  those  who  do 
not  work  the  gold  up  in  highly  specialized  forms,  are  ex- 
ceedingly liquid.  Their  paper,  therefore,  is  exceptionally 
good  in  the  discount  market.    Usually,  too,  the  larger 


8!'i.' 


456 


THE   VALUE   OF   MONEY 


!  , 


•    I 


jewelry  houses  have  specially  good  general  credit  and  high 
reputation.  There  is,  then,  less  disposition  for  the  market 
to  look  askance  at  an  unusual  supply  of  their  paper  than 
would  be  the  case  with  many  other  sorts  of  paper.  They 
tend  to  get  about  as  low  rates  as  anyone  else  in  the  market. 
A  money  market  under  centralized  control  seeking  to  pro- 
tect its  gold,  might  tend  to  raise  discount  rates  on  jewelers' 
paper,  but  a  competitive  money  market  is  very  unlikely 
to  do  so. 

An  increase  in  the  value  of  gold  in  the  arts  would,  thus, 
reflect  itself  pretty  quickly  in  the  money  market,  first  in 
the  form  of  added  value  for  the  services  of  money,  and 
then,  secondly,  in  an  increase  in  the  capital  value  of  money. 
Indeed,  an  increase  in  the  value  of  a  single  rental  is  an 
increase  in  the  capital  value  also,  since  the  value  of  the 
single  rental  is  one  portion  of  the  capital  value.    Not  only 
does  it  mean  a  higher  capital  value  for  gold,  but  it  conse- 
quently tends  to  mean  a  higher  "price."    It  does  mean  a 
higher  "price"  for  present  money  as  compared  with  future 
money.     It  tends,  also,  to  mean  a  higher  "price"  of  money 
in  terms  of  other  goods.    Meeting  higher  money-rates,  all 
borrowers  tend  to  borrow  less,  and  to  buy  less,  to  offer  less 
money  for  goods.    It  need  not  follow,  however,  that  the 
rising  value  of  gold  reduces  prices.    The  rise  in  the  value 
of  gold  in  the  arts  may  well  be  a  manifestation  of  a  general 
rise  of  values.     General  prosperity,   rather  than  causes 
affecting  the  value  of  gold  in  the  arts  alone,  may  have  occa- 
sioned the  increasing  demand  for  gold  in  the  arts.    This 
would  mean  rising  values  for  goods  at  large.    It  might 
well  be,  therefore,   that  the  rise  in  the  values  of  goods 
would  offset  the  rise  in  the  value  of  money,  and  that  prices 
of  goods  would  rise  at  the  same  time  that  gold  is  being 
withdrawn  from  the  money  market  to  the  arts. 
Business  in  general,  as  well  as  the  jewelers,  may  be  mak- 


THE   niNTTIONS   OF   MONEY 


457 


ing  increased  demands  on  the  money  market.  This  would 
tend  still  further  to  raise  the  money-rates.  It  would  also, 
however,  tend  to  increase  the  supply  of  money-funds. 
Commercial  and  industrial  paper,  in  a  time  of  buoyancy  and 
expansion,  is  particularly  acceptable  to  the  banks,  and  they 
are  likely  to  expand  their  loans  despite  the  failure  of  gold 
reserves  to  keep  pace.'  They  simply  get  along  with  smaller 
reserves.  Higher  money-rates  in  such  a  case  tend  to  re- 
duce the  volume  of  business,  but  need  not  actually  reduce 
it,  if  there  are  bigger  profits  than  before  anticipated  in 
business  transactions.  Not  absolute  money-rates,  but 
money-rates  in  relation  to  anticipated  profits  from  the  use 
of  money,  are  significant.  There  is  large  room  here  for 
flexibility,  elasticity,  etc.  There  is  much  slack  to  be  taken 
up  by  the  money-rates,  much  slack  in  the  fluid  substitutes 
for  money  in  various  functions,  and  much  slack  to  be  taken 
up  by  the  volume  of  trade.  But  all  this  will  best  appear 
after  our  discussion  of  the  money  market. 

I  have  said  enough  to  indicate  the  character  of  the  factors 
immediately  determining  the  equilibrium  between  gold  in 
the  arts  and  gold  in  the  money  emplo>-ments.  In  the  pre- 
ceding discussion,  also,  I  have  discussed  the  more  funda- 
mental factors  governing  the  value  of  gold  in  both  employ- 
ments. The  problem  of  translating  the  fundamental  theory 
of  value  into  money  market  terms,  and  of  translating  the 
phenomena  of  the  money  market  into  terms  of  fundamental 
values  is  not  easy.  Most  of  our  value  theory  in  the  past 
has  been  concerned  with  individual  psychology,  Crusoe 
economics,  trading  in  small  markets  with  a  few  buyers, 
barter  transactions,  etc.  It  has  been  abstract  and  unrealis- 
tic. The  practical  students  of  the  money  market,  who  are 
immersed  in  the  facts  of  modem  money,  have  got  little 
help  from  it,  and  have  often  been  scornful  of  it.  I  hope  to 
be  able  to  contribute  something  to  bringing  the  two  methods 


'•ici 


1i: 


458 


THE  VALUE  OF  MONEY 


n 


of  approach  to  common  terms.  They  are  correlative  aspects 
of  the  same  problem.  Each  gives  highly  important  clues  to 
the  understanding  of  the  other.  Neither  can  be  understood 
without  some  understanding  of  the  other.  A  theory  of 
value  which  cannot  be  applied  in  the  mone^'  market,  the 
stock  exchange,  and  the  great  field  of  modern  business 
generally,  has  small  raison  d'etre. 

In  the  next  chapter  I  shall  take  up  the  problems  of  credit, 
and  the  money  market. 


CHAPTER  XXIII 


CREDIT 

Analysis  and  description  are  much  more  important  than 
definition.     Definition  at  the  beginning  of  a  study  is  fre- 
quently a  fetter,  rather  than  an  aid  to  thought.    This  is  es- 
pecially true  in  a  field  where  phenomena  overlap  and  inter- 
lace, and  where  the  "pure principle,"  "essence"  or  "IVesen" 
of  the  thing  defined  never  presents  itself,  but  is  only  to  be 
reached  by  violent  abstraction.    To  pick  out  one  element- 
as  "  futurity ' ' »— as  marking  off  credit  from  other  things  would 
be  an  illustration  of  this.    Or  to  take  the  notion  of  promise, 
or  contract  obligation,  in  connection  with  futurity,  is  like- 
wise to  limit  the  field  unduly,  on  the  one  hand,  and  to  in- 
clude things  which  do  not  belong  there  on  the  other.    Thus, 
a  contract  whereby  A  is  to  build  a  house  for  B  by  the  end  of 
a  year,  receiving  at  that  time,  or  in  instahnents  as  the  work 
proceeds,  a  sum  of  money,  is  not  a  credit  transaction.    We 
have,  however,  promise,  futurity,  and  a  future  payment  of 
money  all  called  for  in  the  contract.    On  the  other  hand, 
if  A  sends  B  a  telegraphic  order  for  money,  which  B  re- 
ceives three  minutes  after  the  money  is  entrusted  by  A  to 
the  telegraph  company,  we  have  a  credit  transaction,  with 
no  element  of  futurity  in  it.    Certainly  there  is  less  of  fu- 
turity there  than  in  the  case  where  a  laborer,  working  ell 
day,  is  paid  only  at  night  for  work  done  in  the  morning. 
Futurity  enters  into  the  values  of  all  goods  which  are  not 
destined  for  immediate  consumption— capital  values  of 
long-time  goods  are  discounted  present  worths  of  future 

*  Cf.  Laughlin's  Principles  of  Money,  p.  73. 
459 


■■  1 


460 


THE  VAr-Ui:  OF  MONEY 


il 


)'l 


B     i 


1h 


values.  Contracts,  promises,  and  beliefs  in  promises  run 
through  the  whole  range  of  economic  life,— the  domestic 
servant,  paid  weekly,  illustrates  all  three.  Yet  only  a 
special  class  of  these  economic  activities  are  commonly 
counted  as  credit  transactions.  Credit  is  really  a  part  of 
the  system  of  economic  value  relations  not  easily  marker!  off 
in  economic  nature  from  the  rest.  Its  clearest  dijfcrcntia 
are  juridical  rather  than  economic.  It  will  be  the  purpose 
of  the  present  chapter,  in  part,  to  blur,  rather  than  to  make 
precise,  the  line  between  credit  and  non-credit  in  economic 
phenomena,  and  to  assimilate  the  laws  of  credit  to  the  gen- 
eral laws  of  value. 

This  will  involve,  however,  a  careful  analysis  and  pre- 
cisioning  of  certain  i)henomena  commonly  counted  as 
credit  phenomena.  Buying  and  selling  on  the  one  hand; 
borrowing  and  lending  on  the  other:  the  distinction  seems 
clear.  It  is  in  law.  But  what  is  it  in  economic  nature? 
When  a  merchant  discounts  his  own  note  at  the  bank,  it  is 
borrowing.  When  he  discounts  the  note  of  another,  his 
debtor,  it  is  selling.  If  he  writes  before  his  endorsement  of 
the  note,  "without  recourse,"  (unusual  at  a  bank,  but  com- 
mon enough  with  real  estate  mortgage-notes)  he  has  made  a 
perfect  sale,  and  is  entirely  out  of  the  transaction.  Is  it, 
however,  in  economic  nature  a  different  transaction  from 
the  original  one  in  which  he  got  the  note  from  a  borrower? 
Legally  bonds  are  credit  instruments,  and  stocks  are  not. 
Stocks  represent  (mnership.  But  practically,  as  an  eco- 
nomic matter,  both  represent  the  alienation  of  control,  on 
faith,  to  a  small  group  of  men,  and  practically,  too,  the 
difference  between  preferred  stocks  and  bonds  is  often  very 
slight.  Whatever  the  l(>gal  rights  of  a  bondholder,  under 
the  terms  of  his  contract,  the  legal  fact  itself  often  is,  under 
the  growing  practice  of  receiverships,  that  he  cannot  exer- 
cise his  right  to  foreclose  without  such  difficulty  that  it 


CRKUir 


4^1 


doesn't  pay  to  do  it.  Very  frequently  indeed  the  junior 
bondholder  will  come  out  of  a  reorganization  as  simply  a 
preferred  stockholder  -  which  is  what  he  practically  was 
all  the  time.  He  couldn't  vote  as  a  bondholder,  '  ut  his 
voting  rights  as  a  stockholder  commonly  mean  little!  As 
a  bondholder,  if  he  held  enough  bonds,  he  might  even  have 
more  influence  on  the  affairs  of  the  corporation  than  as  a 
stockholder.  The  market  is  moved  by  other  forces  than 
the  legal  distinctions  in  corporate  contracts!  And  market 
facts  are  not  necessarily  correctly  told  by  the  accountant's 
categories  either.  I  shall  trouble  myself  little,  in  what 
follows,  with  the  juridical  and  accountancy  problems  of 
credit,  save  in  so  far  as  these  bear  directly  on  the  more 
pertinent  economic  aspects  of  the  matter.  I  am  inter- 
ested in  the  question  of  credit  as  a  part  of  the  problem  of 
value  and  prices— and  particularly  from  the  standpoint 
of  the  problem  of  the  value  of  money. 

What  difference  is  made  in  values  and  prices  by  lending 
and  borrowing?  V'lat  kinds  of  lending  and  borrowing  are 
there?  What  shi.  t  say  of  bank-notes,  of  bank-deposits, 
of  bills  of  exchan^jj?  What  diflerence  is  made  by  the 
money  market?  Behind  the  legal  forms  and  the  technical 
methods,  what  are  the  psychological  forces  at  work?  How 
are  these  psychological  forces  moilified  by  the  technical 
forms  and  methods?  What  are  the  economic  differences 
between  long  and  short  time  loans?  How  shall  we  draw 
the  distinction  between  the  "money-rates"  and  the  long 
time  interest  rate  on  "capital?"  Why  can  some  things 
serve  as  collateral  in  the  money  market  when  others  can- 
not? What  sorts  of  credit  are  appropriate  to  commerce, 
to  manufacturing,  to  agriculture?  Is  credit  capital?  Is 
an  increase  in  credit  an  increase  in  values?  The  last  two  of 
these  questions  imply  that  we  have  a  definition  of  credit. 
Perhaps  the  answers  to  some  of  the  other  questions  may 


463 


TIIF.   VALUE  OF   MOXKY 


in 

m 


in-i 


have  given  us  such  a  Helinition.     But  analysis  and  descrip- 
tion will  prcce<le  (iefmition. 

The  etymology  of  "credit"  has  sometimes  been  taken  as 
the  clue  to  the  meaning  of  the  word  for  economics,  and  the 
idea  of  confidence,  or  belief,  has  been  made  the  heart  of 
the  matter.  A  man  has  gocx!  credit  when  others  have  con- 
fidence in  his  integrity,  etc.  Men  lend  to  others  when  they 
can  trust  them  to  repay.  Doubtless  something  of  this 
sort  was  responsible  for  the  original  choice  of  the  word. 
But  when  loans  are  made  on  good  mortgage  security,  or  on 
collateral  security,  the  personality  of  the  borrower  may 
count  for  little  or  nothing.  Confidence  there  is.  but  not 
confidence  in  the  intentions  of  the  borrower.  The  con- 
fidence is  in  the  "goodness"  (/.  e.,  the  value  and  market- 
ability) of  the  collateral.  The  same  questions  are  raised 
by  the  lenfler  here  which  he  would  raise  if  he  were  going  to 
buy  the  thing,  instead  of  lending  with  it  as  security.  None 
the  less,  I  think  that  in  the  etymology  of  the  word  we  have 
an  important  clue.  We  must  generalize  the  notion,  how- 
ever, beyond  the  limits  of  confidence  in  personal  intentions. 
It  involves  confidence  in  the  general  economic  situation,  in 
the  future  of  business,  in  the  permanence  of  values,  in  the 
certainty  of  future  incomes,  etc.  Thus  viewed,  the  element 
of  confidence,  though  important  in  highest  degree,  is  not 
peculiar  to  the  phenomena  which  we  c  all  credit  phenomena 
in  economics.  It  appears  wherever  there  are  values  which 
depend  on  future  events.  One  does  not  need  much  con- 
fidence in  buying  potatoes  or  apples  or  meat — though  in 
the  case  of  meat  quite  a  lot  of  confidence  may  be  involved — 
and  misplaced!  But  whenever  the  future  is  involved, 
whenever  capital  values  of  any  kind  are  involved — lands, 
stocks,  bonds,  houses,  horses,  manufacturing  equipment, 
etc. — the  element  of  belief,  confidence,  hopeful  attitude 
toward  the  future,  is  quite  as  much  present  as  in  the  case  of 


CUEDIT 


463 


a  loan.  Nor  Is  the  clement  of  personal  confidence  less 
present,  often,  in  these  thinRs  than  in  the  case  of  a  loan. 
Very  often  the  value  of  a  horse  may  depend  in  considerable 
degree  on  the  intcRrity  of  the  man  who  offers  it  for  sale; 
the  value  of  a  piece  of  land  may  be  much  enhanced  if  a 
trustworthy  owner  makes  certain  statements  as  to  the 
yields  he  has  got  from  it;  the  values  of  stocks  (really  credit 
instruments,  from  the  angle  of  economic  analysis)  may  de- 
pend very  much  on  the  personality  of  the  organizers  and 
managers  of  a  corjjoration.  Personal  prestiges  may  count 
for  much  more  in  these  cases  than  in  the  case  of  a  collateral 
loan. 

Further,  in  connection  with  the  element  of  belief,  or 
confidence.  Borrowing  is  expensive,  and  men  do  not  bor- 
row for  amusement.  That  borrowing  and  lending  may 
increase,  it  is  not  enough  that  lenders  have  confidence  in 
the  ability  of  borrowers  to  repay.  Borrowers  must  also 
have  confidence  in  the  future  of  their  businesses,  in  their 
ability  to  make  enough  out  of  the  loan  to  pay  the  expense 
involved,  and  have  a  surplus  left  over.  I  abstract  here 
from  consumption  loans.  They  play  a  very  minor  role.' 
The  analysis  in  an  earlier  chapter,  based  on  Kinley's 
figures,  showing  that  retail  trade  is  less  than  one-eleventh 
of  the  total  pecuniary  transactions  in  loog,  and  that  the 
percentage  of  credit  instruments  used  in  retail  trade  is  much 
lower  than  in  other  transactions,  will  justify  us,  when  quan- 
titative questions  are  involved,  in  abstracting  from  con- 
sumption loans.  Since  such  loans  will  be  chiefly  employed 
in  retail  buying,  and  since  we  know  that  most  retail  buying 
does  not  result  from  loans  for  consumption  purposes,  we 
may  conclude  that  modem  credit  is  overwhelmingly  of  a 

'  The  main  modem  tj^ie  of  !o.<in  for  non  h«RJne«s  ptirposc«  is  the  public 
loan  for  war  purposes,  or  to  meet  fiscal  deficits.  In  the  case  of  war  loans, 
the  emergencies  are  often  so  great  that  the  rate  of  interest  makes  little 
difference. 


464 


THE  VALUE  OF  MONEY 


:SI 


fliiTerent  sort.  Most  of  it  arises  from  bus'ness  activities 
of  one  kind  or  another,  and  rests  on  expectation  of  profit 
and  loss.'  Such  loans  are  not  niade  when  borrowers,  as 
well  as  lenders,  have  not  confidence  in  the  transactions  they 
mean  to  put  through. 

So  far  the  thing  has  run  in  terms  of  indi/idual  calcula- 
tion of  profit  and  loss.  But  even  the  most  sagacious  busi- 
ness men  do  not  play  a  lone  h  ind.  No  one  is  uninfluenced 
by  the  expectations  and  feeHni,'s  of  others.  In  general, 
business  confidence  is  in  large  degree  a  matter  of  social 
psychologj'.  resting  on  suggestion,  contagion,  etc.,  as  well 
as  on  cool  calculation  of  profit  and  loss.  Even  where  men 
are  able  in  considerable  degree  to  free  themselves  from  the 
prevailing  optimism  or  pessimism,  they  must  take  it  into 
account.  The  man  who  extends  his  business  when  nobody 
is  in  the  mood  to  buy,  when  no  one  will  make  contracts 
with  him,  runs  a  very  fair  chance  of  bankruptcy,  even 
though  there  be,  in  the  technical  facts  of  industry,  no  rea- 
son for  the  prevailing  pessimism.  A  man  with  large  re- 
sources, which  are  not  fully  employed,  seeing  that  ihe  pre- 
vailing "bad  business"  is  "largely  psychological"  may, 
indeed,  take  advantage  of  the  fact,  g  t  his  labor  and  raw 
materials  cheaply,  and  produce  some  staple  in  advance 
of  his  market.  If  he  can  afford  to  hold  his  surplus,  he  may 
make  large  profits  by  so  doing.  But  usually  business  men 
will  not,  in  such  a  situation,  have  the  surplus  resources  to 
'.nable  them  to  put  through  such  an  undertaking,  and 
hence,  even  though  they  may  recognize  that  the  rest  of  the 
business  world  is  ii.ational,  they  must,  perforce,  conform 
to  its  irrationality,  and  their  sober  estimate  of  the  prospects 
of  a  given  undertaking  may  be  just  as  much  adverse  as  if 
they  shared  the  feeling  of  gloom  which  all  about  them  feel. 

'  No  longer  tnie  of  Fiirope,  probably,  since  the  huge  war  ciebts  ha\e  been 
incurrecl. 


CREDIT 


465 


i 


1 


They  meet  it  from  the  banker  from  wnom  they  wish  to 
borrow.  Even  if  able  to  borrow,  they  meet  it  from  the 
dealers  to  whom  they  are  accustomed  to  sell  their  products. 
The  prevailing  gloom  is  as  much  a  fact  with  which  they 
must  reckon  as  is  the  price  of  their  raw  materials,  or  the 
technical  qualities  of  those  raw  materials. 

Further,  business  confidence  is  not  a  matter  in  which 
each  man  counts  one!  There  are  centers  oi  prestige,  men 
and  institutions  whose  attitude  toward  the  future  counts 
heavily  indeed  in  determining  the  attitudes  of  others.  These 
prestiges  may  arise  from  various  causes.  Recognized 
wisdom  and  probity  may  give  a  man  great  prestige  in 
economic  matters.  There  are  financial  writers  and  students 
of  the  market,  not  necessarily  men  of  great  wealth,  whose 
opinions  are  exceedingly  influential  in  making  business 
confidence.  The  wisdom  without  the  probity  is  not 
enough.  Some  men,  known  to  be  sagacious  students  of 
the  market,  have  been  known  to  succeed  in  *heir  plans  by 
telling  the  truth,  with  the  result  that  everybody  else  did 
the  wrong  thing!  They  made  business  confidence,  but  not 
the  sort  that  was  complimentary  to  them.  Other  men  have 
prestige,  influence  in  making  business  confidence,  by  virtue 
of  possession  of  large  wealth.  They  are,  first,  in  position 
to  lend  largely.  Their  decisions  count  directly  for  more 
than  the  decisions  of  thousands  of  other  men.  The  very 
fact  that  they  have  confidence  in  the  future,  apart  from 
anything  else,  means  a  tremendous  increase  in  cjfcclivc 
business  confidence — which  we  are  here  concerned  with. 
The  optimism  of  a  man  who  can  neither  buy  nor  sell  nor 
borrow  nor  lend,  because  he  himself  has  no  economic  re- 
sources, and  no  prestige,  is  like  the  desire  of  a  penniless 
beggar  for  an  economic  good — its  effect  on  the  market  is 
not  great!  But  further,  the  fact  thai  a  rich  man  is  lending 
makes  possible  activities  which  would  not  otherwise  be 


466 


THE   VALUE  OF   MONEY 


!i  ■    - 


\ 

i 


\ 


:  i 
I 


possible,  and  so  justifies  confidence  on  the  part  of  those 
who  wish  to  deal  with  those  to  whom  he  lends.  Such  a 
man  may,  on  *'ie  other  hand,  borrow.  His  borrowing,  for 
business  activity,  justilies  confidence  on  the  part  of  those 
who  W'  aid  deal  with  him.  Quite  apart,  therefore,  from 
any  influence  on  the  opinions  of  others  growing  out  of 
respect  for  his  judgment,  or  less  rational  reaction  to  him, 
he  can  do  much  to  make  or  unmake  business  confidence. 
But  commonl)-,  also,  such  a  man  is  a  center  of  prestige,  as 
well  as  a  controller  of  economic  power  by  virtue  of  his 
wealth.  Men  look  to  him  for  their  cue.  If  he  has  confi- 
dence enough  in  the  future  to  risk  his  great  wealth,  surely 
smaller  men  with  smaller  interests  need  not  be  afraid.  Vi- 
tally important  centres  for  the  making  and  con^i-oUing  of 
business  contidence  are  the  banks.  Raving  intin  te  knowl- 
edge of  the  affairs  of  many  business  men,  of  business  men  iix 
many  diff'erent  lines,  they  are  in  a  position  to  judge  wisely 
of  business  prospects.  Having  great  power  to  make  or 
refuse  loans,  they  can  encourage  or  chill  the  enthusiasm 
which  business  men  niay  independently  develop.  The 
whispered  word  of  a  banker  may  well  count  for  more  than 
the  half-page  advertisement  of  a  promoter.  But  the  banker 
is  not  all  powerful.  His  influence  is  much  greater,  often, 
in  restraining  than  in  evoking  business  confidence.  Bankers 
may  during  long  periods  be  quite  unable  to  increase  their 
loans,  though  they  tempt  borrowing  by  easy  rates. 

Business  confidence  is  a  fact  of  social  psychology.  It 
is  an  organic  phenomenon,  with  radiant  points  of  control. 
It  is  a  matter  of  inter-mental  activity,  rather  than  a  thing 
in  which  each  man  makes  an  independent  choice. 

But  this  is  to  say  nothing  of  credit  phenomena  that  is 
not  true  of  all  value  phenomena.  All  economic  values  are 
social  values.  The  values  of  wheat  or  sugar  or  bicycles  are 
social  values.    There  are  centers  of  power  and  prestige, 


CREDIT 


467 


growing  out  of  the  distribution  of  wealth,  or  various  other 
social  factors,  which  have  a  dominating  influence  on  eco- 
nomic values,  as  a  rule.  Credit  phenomena  are  merely  part 
and  parcel  of  the  general  system  of  economic  motivation 
and  control. 

In  Social  Value  (pp.  102-103)  I  have  denied  the  doctrine 
of  Meinong  and  Tr-de  that  explicit  belief,  existential 
judgments,  are  essential  to  the  existence  of  values,  taking 
value  in  the  generic  sense,  which  includes  aesthetic  value, 
religious  and  patriotic  value,  legal,  moral,  and  other  values. 
I  have  pointed  out  that  we  do,  at  times,  value  ideal  objects, 
the  creatures  of  our  imaginations.  The  dead  sweetheart, 
or  the  Beatrice  that  never  was  (or  that  never  was  what  she 
was  imagined  to  be)  may  have  tremendous  value.  Not 
merely  things  hoped  for.  but  things  hopelessly  gone,  as  "  The 
Lost  Cause"  to  the  Southerner,  may  be  objects  of  value  so 
high  that  other  things,  known  to  be  real,  may  sink  into 
insignificance  beside  them.  Even  in  these  cases,  however, 
there  must  be  a  ''rea.lity -feeling,"  an  unconscious  presump- 
tion or  assumption  that  the  object  valued  is  real.  Indeed, 
belief,  as  distinguished  from  mere  ideation,  is  an  emotional 
"tang,"  an  essentially  emotional,  rather  than  intellectual, 
fact.  If  it  be  present,  the  ideation  and  explicit  judgment 
may  be  dispensed  with. 

It  is,  however,  characteristic  of  economic  values,  par- 
ticularly of  the  values  of  instrumental  goods  and  of  the 
goods  with  which  business  men  make  profits,  that  the 
tendency  to  raise  the  question  of  reality,  to  require  explicit 
judgment,  is  strong.  The  successful  business  man  is 
necessarily  the  man  who  does  this,  who  does  not  too  highly 
value  the  creatures  of  his  imagination,  when  he  imagines 
a  vain  thing.  One  need  not,  perhaps,  seriously  raise  the 
question  as  to  the  reality  of  the  loaf  of  bread  he  buys.  Ex- 
plicit judgment  there  would  be  superfluous.    But  very 


if 


\  i  1 1 


•'  m 


I 


i 

i 

f 
i 

liil 


M 


468 


THE  VALUE   OF  MONEY 


serious  questionings  come  in  whenever  lands  or  houses  or 
securitit's  or  bills  of  exchange  come  in.  One  needs  to  know 
what  the  facts  are,  and  to  make  judgments  based  upon 
them.  Hence,  for  all  values  of  capital  goods  and  income- 
bearers,  for  the  values  which  pass  in  wholesale  and  si)ecula- 
tive  trading  in  general,  the  matter  of  belief  is  vitally  im- 
portant. Here,  again,  then,  we  have  nothing  in  the  psy- 
chological principles  underlying  credit  phenomena  to  mark 
them  ofT  from  the  general  field  of  value  phenomena. 

The  general  laws  of  value,  then,  apply  in  the  case  of 
credit  phenomena.  We  find  nothing  unique  in  essence  in 
them.  The  juridical  relations,  also,  in  so  far  as  they  have 
economic  significance,  shade  into  one  another.  To  buy 
a  bond  from  a  bondholder  is  purchase  and  sale.  To  pay 
a  borrower  money  for  his  personal  note  is  lending.  But 
from  the  standpoint  of  the  theory  of  value  and  prices  this 
distinction  may  be  ignored.  \\  may  extend  the  idea  of 
buying,  selling,  and  price  to  cover  all  contracts  where 
values  are  balanced  against  values,  and  expressed  in  terms 
of  each  other.  Future  money  has  its  price  in  present 
money,  just  as  much  as  present  wheat  has  its  price  in 
present  money.  Really  it  is  not  future  money  against 
present  money.  It  is  a  case  of  rights,  which  involve  the 
payment  of  money  in  the  future,  sold  for  money,  and  priced 
in  money.  In  general,  it  is  rights,  rather  than  things, 
which  pass  in  economic  exchange.  Physical  delivery  does 
not  constitute  selling.  Delivering  a  load  of  wheat  to  a 
railroad  does  not  constitute  sale  of  the  wheat  to  the  rail- 
road; selling  a  farm  does  not  involve  any  physical  moving 
of  the  farm.  Rights,  in  personam  or  in  rem,  are  objects 
of  economic  value,  and  the  exchange  of  these  rights  makes 
up  the  bulk,  if  not  the  whole,  of  economic  exchange.  (Ex- 
change may  be  limited  to  the  transfers  of  juristic  rights, 
without  value  being  so  limited.    I  have  discussed  the  rela- 


K 


CREDIT  460 

tions  of  value  and  exchange  in  the  chapter  on  "Value," 
above.)    Property  rights  are  commonly  conceived  of  as  the 
proper  objects  of  buying  and  sale.     Contracts  involving 
the  future  services  of  free  men  stand  legally  on  a  different 
footing   from   contracts   regarding  physical   goods.    But 
economic  analysis  is  not  greatly  concerned  with  these  dis- 
tinctions, except  in  so  far  as  they  affect  the  values  of  the 
things  exchanged,  and  so  the  terms  of  the  exchanges.     I 
do  not  believe  that  the  legal  distinctions  can  be  made  to 
run  on  all  fours  with  any  significant  economic  distinctions, 
and  shall  not  undertake  to  make  them  do  so.    In  the 
phenomena  we  have  simply  cases  of  buying  and  selling  (in 
a  generalized  sense  of  those  terms)  of  rights,  at  prices  (by  a 
very  slight  extension  of  the  term,  price,  to  which  the  market 
is  well  accustomed).    The  terms  of  these  exchanges,  the 
pnces,  are  governed  by  values,  social  economic  values,  in 
no  wise  different  from  the  values  which  govern  the  prices 
in  exchanges  which  we  do  not  class  as  credit  transactions. 
I  say  that  credit  phenomena  are  exchanges  of  rights.    This 
is  true  of  all  exchanges.    We  do  not  exchange  rights  for 
money.    We  exchange  rights  to  other  things  for  rights  to 
money.  The  mere  physical  transfer,  even  of  money,  does 
not  give  rights  to  the  money.    I  may  me'-ely  be  giving  you 
the  money  for  safe  keeping,  or  for  use  for  my  purposes. 
While  the  law  makes  the  rights  to  money  that  has  left  the 
hands  of  its  owner  less  lasting,  as  against  innocent  third 
parties,  than  in  the  case  of  other  objects,  and  while  the 
right  to  money  is  always,  or  almost  always,  met  by  return- 
ing other  money  of  equal  amount,  even  in  the  case  of  money 
it  is  a  right,  and  not  a  mere  physical  transfer,  that  is  sig- 
nificant. 

Our  problem  regarding  credit  is,  then,  much  simplified. 
We  have  simply  to  pick  out  certain  economic  exchanges  to 
which  the  name  of  credit  transactions  has  been  applied,— 


It 


470 


THE  VALUE  OF  MONEY 


a  various  and  heterogeneous  set  of  exchanges,  in  many 
ways- -and  study  them,  to  find  their  peculiarities.  These 
peculiarities  will  not  make  them  exceptions  to  the  general 
laws  of  value.  They  will  make  them  merely  special  cases. 
To  find  essential  principles  marking  off  credit  transactions, 
at  large,  from  non-credit  transactions  is  an  exceedingly 
difficult  thing.  There  are  more  differences  among  credit 
transactions  themselves,  than  there  are  between  the  genus, 
credit  transactions,  and  the  class  of  things  not  called  by 
that  name. 

Thus,  monthly  payments  of  rent,  of  wages,  of  college 
professors'  salaries,  are  not  commonly  called  credit  transac- 
tions. The  monthly  payment  of  grocery  bills,  or  of  tele- 
phone bills,  involves  credit.  Where  is  a  real  difference  to 
be  -found?  On  the  other  hand,  between  book  credit  be- 
tween grocer  and  patron  on  the  one  hand,  and  a  bank-note 
or  deposit  credit  on  the  other,  the  difference  is  large,  in 
many  practically  important  ways.  Between  a  call  loan 
and  a  ten  year  agricultural  mortgage-note,  the  differences 
are  even  greater. 

One  may  be  disposed  to  find  the  differences  between 
credit  transactions  and  non-credit  transactions  in  the  fact 
that  the  former  stipulate  a  definite  sum  of  money,  due  at 
definite  times.  This  would  partly  differentiate  a  bond, 
say.  from  a  stock.  The  bond  not  merely  calls  for  stipulated 
yearly  pajinents,  but  also  calls  for  a  definite  payment  at 
the  end.  This  would,  however,  exclude  British  Consols 
from  the  list  of  credit  instruments!  British  Consols  differ 
from  safe  preferred  stocks  in  legal,  rather  than  in  economic, 
ways.  Legally  they  are  alike  in  that  no  terminal  payment 
is  called  for.  Practically  they  are  alike  in  that  annual 
regular  sums  may  be  expected.  It  may  at  least  be  said  of 
credit  transactions  that  stipulated  money  payments,  either 
at  a  different  time  or  a  different  place,  arc  called  for.    This 


CREDIT 


471 


would  include  the  telegraphic  transfers  of  funds,  and  would 
exclude  the  case  where  A,  a  farmer,  does  a  day's  work  for 
B,  a  neighbor,  for  the  promise  of  a  day's  work  in  return  at 
a  later  season.  The  latter  transaction  involves  many  of 
the  elements  that  definitions  of  credit  have  included,  but  i 
think  that  we  may  at  least  limit  our  conception  of  credit 
transactions  to  transactions  within  a  money  economy, 
where  money,  as  a  measure  of  values,  functions  in  the 
calculations.  Shall  we,  however,  limit  credit  transactions 
to  cases  where  a  stipulated  amount  of  money  is  named  in 
the  contract,  for  a  stipulated  time? 

Shall  we  exclude  contracts  where  the  payment  of  money 
is  made  contingent  on  anything?  By  contingency  here  I 
mean  legal  c  iitingency.  This  test  would  exclude  the 
highest  grade  preferred  stock.  It  would  include  the 
shakiest  bonds  that  contained,  in  the  terms  of  the  con- 
tract, no  contingency.  But  where,  then,  would  one  place 
such  an  instrument  as  the  Seaboard  Airline  Adjustment 
5%  Bonds,  which  may  default  in  a  given  year  half  of  the 
interest,  if  it  is  not  earned,'  and  which  yet  call  for  the  pay- 
ment of  the  principal  at  a  stipulated  time? 

What  shall  we  say  of  "borrowing  and  carrying"  transac- 
tions on  the  stock  exchange?  Is  not  the  loan  of  stocks  a 
real  credit  transaction?  Ordinarily,  when  stocks  are  put 
up  as  collateral,  one  thinks  of  the  money  as  being  lent,  and 
the  stock  merely  as  a  pledge.  But  in  the  case  of  borrowing 
stocks  by  a  bear  to  deliver  next  day,  the  transaction  is 
definitely  thought  of  as  a  loan  of  stock.  It  is  sometimes 
paid  for,  the  bear  paying  the  bull  a  premium,  instead  of 
receiving  interest  on  the  money  he  has  turned  over  to  the 
bull  as  a  "pledge."  The  more  usual  thing,  is,  of  course, 
for  the  bull  to  pay  the  bear  interest.    But  in  a  contract 

'  The  interest  so  defaulted  is  cumulative,  like  a  preferred  di\  idend,  for 
years  af^.er  1909.    Wall  Street  speaks  of  this  issue  as  a  "half-bond." 


r 


472 


THE   VALUE   OF   MONEY 


'  !  i 


"I    •;' 


like  this,  there  are  many  contingencies.  As  the  stock  rises 
in  value,  the  bear  must  lend  more  money  to  the  bull;  if 
the  stock  falls,  the  bull  must  return  part  of  the  money  to 
the  bear.  Both  times  and  amounts  are  here  contingent, 
even  though  in  the  end  the  amounts  lent  and  repaid  balance. 
Call  loans,  of  course,  do  not  call  for  payment  at  a  stipulated 
time,  and  the  same  is  true  of  bank-deposits  and  bank-notes, 
and  of  many  other  forms  of  credit.  Interest  on  deposits 
in  mutual  savings  banks  is  contingent,  legally,  as  to  amount. 
Are  insurance  policies  credit  instruments?  What  of  en- 
dowment policies? 

It  is  easy  to  draw  legal  distinctions  in  all  these  cases, 
but  to  show  that  definite  and  uniform  economic  conse- 
quences flow  from  these  legal  distinctions  is  quite  impos- 
sible. Rather,  it  is  easily  possible  to  show  that  uniform  or 
certain  economic  consequences  do  not,  in  general,  flow 
from  them. 

I  shall  refrain  from  the  effort  to  give  a  general,  funda- 
mental definition  of  credit.  I  shall  rather  discuss  certain 
of  the  more  important  t\pes  of  what  have  been  called  credit, 
with  a  view  to  seeing  what  bearing  they  have  on  the  prob- 
lems with  which  this  book  is  concerned;  the  value  of  money, 
and  prices.  The  general  class  of  transactions  to  which  the 
name,  credit  transactions,  has  been  applied  may  be  roughly 
designated  as  transactions  in  which  the  consideration  on 
one  side,  at  least,  is  the  assumption  of  a  debt,  running  in 
terms  of  money  (though  not  necessarily  to  be  paid  in  actual 
money),  payable  cither  at  a  future  time  or  at  another  place. 
Objections  can  be  found  to  this  definition.  It  does  not 
meet  the  fundamental  test  of  a  definition  that,  for  the  pur- 
pose in.  hand,  it  should  seize  upon  the  essential  and  unique 
characteristic  of  the  things  marked  off.  I  am  not  sure  that 
it  meets  the  tests  of  inclusiveness  and  exclusiveness  even 
for  those  transactions  which  we  call  credit  transactions. 


CREDIT 


47.^ 


Thus,  if  A  and  B  go  to  the  bank  together,  and  A  there  buys 
B's  horse,  standing  in  front  of  the  bank,  giving  B  in  return 
a  check,  which  B  immediately  cashes  in  the  same  room 
where  the  check  is  drawn,  the  idea  of  different  time  or 
different  place  is  not  realized  in  any  but  a  technical  sense. 
A,  in  drawing  the  check  is.  of  course,  assuming  a  debt.  The 
check,  if  repudiated  by  the  bank,  becomes  a  note,  which  A 
must  pay.  A,  moreover,  is  paying  B,  not  with  money,  but 
with  the  transfer  of  a  claim  on  the  bank,  and  the  fact  that 
his  check,  if  unpaid,  becomes  a  note  is  not  the  main  fact 
about  the  check.  Understanding  our  definition  of  credit 
to  cover  this  case  also,  however,  and  attaching  no  funda- 
mental importance  to  the  definition  save  as  a  means  of 
marking  off  a  class  of  more  or  less  related  phenomena 
which  we  mean  to  discuss,  the  definition  will  serve. 

Thus  defined,  we  have  in  credit  a  concept  susceptible  to 
quantitative  treatment.  Debts,  in  terms  of  money,  can  be 
summed  up,  and  we  may  have  the  concept  of  the  "volume 
of  credit"  as  the  sum  of  such  debts  at  a  given  time,  or 
through  a  given  period  of  time,  or  as  an  average  through  a 
period  of  time.  We  may  distinguish  credit  transactions 
from  credit,  defining  credit  as  the  volume  of  debts,  and 
credit  transactions  as  transactions  in  which  the  debts  are 
passed  in  exchange.  This  would  be  to  broaden  the  notion 
of  credit  transactions  beyond  the  usual  conception,  since 
it  would  include  transactions  in  which  A  sells  ("without 
recourse")  B's  note  to  C.  It  would  also  include  cases 
where  bonds  are  sold.  It  would  exclude  cases  where  stocks 
ar-i  sold,  since  they  are  not  legally  debts.  Some  would 
prefer  to  limit  the  notion  of  credit  transaction  to  transac- 
tions in  V.  hich  there  remains  some  contingent  responsibility 
on  the  part  of  the  one  who  uses  the  credit  instrument,  but 
this  would  be  to  deny  the  name,  credit  transaction,  to  cases 
where  bank-notes  or  government  paper  are  used  in  pay- 


474 


THE  VALUE  OF  MOXEY 


illl 


merits,  as  well  as  to  dery  it  to  the  case  where  bonds  are 
sold.  It  is  not  important,  for  my  purposes,  to  draw  a  sharp 
line  about  the  loncept,  credit  transaction,  however.  And 
about  the  concej)t  credit  itself  I  have  drawn  a  line  resting 
t)n  a  k'Kal,  rather  than  an  economic,  distinction. 

Within  the  lield  of  credit,  thus  defined,  we  may  single 
out  for  especial  consideration  certain  forms  of  demand  or 
short  time  credit,  particularly  bills  of  exchange,  bank-notes 
and  bank-deposits,  and  merchants'  book-credit.  We  shall 
also  have  something  to  say  regarding  long-time  credit,  in- 
cluding bonds,  and  mortgage-notes  that  have  no  general 
market. 

All  these  debts  in  terms  of  money,  to  which,  in  the  aggre- 
gate, we  have  given  the  name,  volume  of  credit,  have  grown 
out  of  exchanges.  Exchange  is  here  used  in  a  wide  sense, 
and  is  not  confined  to  the  case  where  goods  or  .services  are 
bought  and  sold.  It  is  an  exchange,  if  a  man  gives  his 
note  to  a  banker  in  return  for  a  deposit  credit.  But,  on 
the  assumption  that  exchanges  are  made  only  when  gains 
are  to  be  realized,  it  follows  that  all  debts,  and  so  all  credit, 
have  been  created  in  view  of  anticipated  gains  (or  to  avert 
anticipated  losses).  In  a  society  where  everything  is  in 
equilibrium,  a  "static  state,"  where  there  are  no  "transi- 
tions" to  be  effected,  where  there  is  no  occasion  for  specula- 
tion, and  where  exchanges  of  lands,  etc.,  are  negligible,  the 
volume  of  all  exchanges,  including  those  where  debts  are 
passed  in  exchange,  would  be  small.  The  occasion  for  the 
creation  of  the  debts  which  make  up  the  volume  of  credit 
would  not  be  nearly  so  numerous  as  under  dynamic  condi- 
tions. The  volume  of  credit,  in  other  words,  is  largely  a 
function  of  dynamic  conditions,  even  though  credit  would 
exist  in  a  static  condition  of  economic  life.  The  bulk  of 
credit,  as  the  bulk  of  exchanging,  grows  out  of  dynamic 
conditions,  transitional  changes,  and  the  like. 


CREDIT 


475 


This  will  be  clearer  when  wc  raise  the  question  as  to  why 
debts  are  created,  as  to  what  function  debts  perform  in 
economic  life.  Why  should  a  man  borrow?  Let  us  sup- 
pose that  a  farmer  has  600  acres  of  land.  He  wishes  to  sell 
100  acres,  and  use  the  proceeds  in  buying  equipment  for 
his  farm.  But  he  fmds  it  difficult  to  sell  the  100  acres. 
There  is  no  ready  market.  He  can  sell  it  immediately 
only  at  a  great  sacrifice.  By  waiting,  and  looking  indus- 
triously for  a  customer,  or  by  engaging  a  real  estate  dealer 
to  do  so,  he  could  finally  Imd  a  buyer,  but  the  thing  is  slow 
and  uncertain,  and  he  wishes  to  get  the  equipment  at  once. 
He  borrows,  therefore,  giving  his  farm  as  security,  or  a  part 
of  the  farm  as  security.  He  exchanges  a  claim  on  the  future 
income  of  the  farm  for  present  money,  and  with  this  he  can 
buy  the  equipment  he  needs.  The  net  result  has  been  that 
the  credit  transaction  has  transformed  his  unmarketable 
quantum  of  value  into  a  marketable  form  of  value.  He 
has  been  able,  by  an  indirect  step  to  do  what  he  could  not 
do  directly — to  trade  a  part  of  the  farm  (which  in  its  eco- 
nomic essence  is  a  prospect  of  future  income)  for  the  equip- 
ment. In  this  illustration,  credit  has  functioned  as  a  means 
of  increasing  the  marketability  or  saleability  of  non-pecuniary 
forms  of  wealth.  Credit  is  primarily  a  device  for  efTecting 
exchanges  that  could  not  otherwise  be  effected,  or  for  effect- 
ing exchanges  more  easily  than  they  could  otherwise  be 
effected.  This  means  that  credit  transactions  are  a  part 
of  the  productive  process,  and  that  they  increase  values. 
It  is  the  function  of  credit  to  universalize  the  characteristic 
of  money,  high  saleability.  It  is  the  function  of  credit  to 
"coin,"  so  to  speak,  rights  to  goods  on  shelves,  lands,  etc., 
etc.,  into  liquid  rights,  bearing  the  dollar  mark,  which  are 
much  more  highly  saleable  than  the  rights  in  their  original 
form  were,  and  which  often  become  as  saleable  as  money 
itself,  functioning  perfectly  .>  money. 


t  '. 


476 


TIIK  VALUE  OF  MONKY 


Cmlit    thus   tends   to  univcrsiillzc   that   characteristic 
whith    Mcngcr  '    ronsidtrs    the   unitjue   characteristic   0/ 
money.     Hy  means  of  credit  transactions,  a  man  borrows 
"i>  t"  50*;^  of  the  value  of  the  farm,  makes  his  farm  in  cfTect, 
50' ;  saleable  or  fluid.     The  man  who  owr    'ivestock  ma}- 
not  be  able,  on  a  given  day.  to  market  them  without  lo.ss, 
but  he  can  use  their  \alue  in  the  market,  up.  say.  to  -js^i' 
l)y  a  loan.     The  man  who  owns  a  hundred  shares  of  United 
States  Steel  may  not  be  able,  at  a  given  time,  to  market 
them  to  his  satisfaction     though  in  the  case  of  articles  and 
stocks  dealt  in  in  the  speculative  markets  saleability  is  very 
high  indeed,  and  in  the  case  of  United  States  Steel,  in  par- 
ticular, the  "spread"  between  "'buying  price"  and  "selling 
I>rice"  is  very  narrow     but  he  can  borrow,  with  the  stock 
as  security,  up  to  So*;,'  of  its  value.    On  a  bond  of  the 
United  States  government,  he  may  borrow  up  to  loo^^,.* 
The  process  of  creating  credit  is  a  process  of  transforming 
rights  from  unsaleable  to  saleable  form.     Often  this  means 
the  subdivision  of  rights,  preferential  rights  to  a  portion  of 
the  value  of  a  piece  of  wealth  being  more  saleable,  be- 
cause of  greater  certainty,  than  the  total  right  to  the  whole. 
Another  reason  why  partial  rights  may  be  more  saleable  is 
that  the  value  lepr..  .^ted  by  tach  partial  right  is  smaller. 
It  is  easier  to  market  things  worth  a  thousand  dollars  than 
things  worth  fifty  thousand,  as  a  rule.    In  any  case,  a 
chief  economic  function  of  credit  is,  -//tc  chief  function  for 
our  purposes— to  make  fluid  and  saleable  articles  of  wealth 
other  than  money;   to  universalize  the  quality  of  sale- 
ability. 

This  justifies  us  in  our  contention  made  before  that  alt 

'Supra,  (hapiir  on  "Origin  of  Money." 
^"It  is  nmli.'ss  to  say  that  (Jovfrnmcni  Ixwl;  al.vnv:-;  rank  as  the  virry 
hiKhcst  class  of  collateral,  and  the  hanks  require  no  marpin  on  such  security  " 
I'ratt,  Work  of  Hall  Slnrl,  191.'  ed.,  [>.  287.    This,  it  need  not  be  said,  is 
not  ahvays  true! 


CRKDir 


477 


corporate  securities,  whether  stocks  or  bonds,'  .ire,  in 
economic  nature,  alike.  Driven  lo  a  le^ai  concept  for  a 
definition  of  cre(h't,  \vc  were  ol)h'|<e<l  to  exclude  stcKks  from 
our  rough  dellnition.  Hut  coq)orate  organization  does 
precisel}'  what  the  various  other  transactions  that  we  have 
culled  credit  transactions  do.  Lands  and  buildings  and 
machinery,  or  the  roadbed  and  rolling  stock  v(  a  railroad, 
are  highly  siK'ciali;;ed,  often  unlit  for  use  in  any  form  other 
than  that  in  which  they  now  appear.  As  concrete  instru- 
ments of  production,  they  would  be  highly  unsaleable. 
In  their  totality,  a;,  a  going  concern,  they  are  highly  unsale- 
able, because  in  the  aggregate  so  very  valuable.  Grouped 
together,  however,  but  still  subdivided,  the  objects  of  many 
thousands  of  partial  rights,  represented  by  stocks  and 
bonds,  they  become  saleable  in  high  degree. 

As  objects  other  than  money  gain  in  salcability,  they 
tend  to  gain  in  value,  also.  This  is  not  necessarily  true, 
always.  If  wealth  is  already  in  the  best  place,  at  the 
proper  time,  and  in  the  proper  hands,  no  point  is  involved 
in  further  exchanges.  Additional  saleability —or  an  in- 
crease in  the  qualities  that  make  for  salcability  -could 
mike  no  dilTerence.  But  when  objects  could  be  employed 
to  greater  advantage  if  in  dilTercnt  hands,  if,  in  other  words, 
ihere  is  occasion  for  exchange,  then  whatever  adds  to  the 
salcability  of  a  good  adds  to  its  value.  What  would  other- 
wi.se  have  gone  into  the  trouble  and  exi)ense  of  marketing 
now  is  saved.  In  general,  items  of  wealth  tend  to  gain  in 
value  as  they  gain  in  salcability— though  not  in  any  definite 
proportion. 

Further,  as  objects  of  \alue  other  than  money  gain  in 
salcability,  money  tends  to  lose  its  dijjcrcnl'nil  advantage  in 

'  Veblen  has  clalx)rated  the  doctrine  that  slocks  and  bonds  arc  miu  h  tlic 
same.  Cf.  the  discussion  in  .Meade's  Cnrpnratimi  h'iimncc  of  the  relation 
of  jui.ior  bonds  and  preferred  stocks  in  reorganizations. 


m^^ 


H 


478 


THE   VALUE   OF  MONEY 


•t  M 


this  respect,  and  so  tends  to  lose  that  part  of  its  value  which 
comes  from  the  monjy-uses.  If  all  things,  including  gold, 
were  equally  saleable,  there  would  be  no  raison  d'etre  for 
money,  and  gold  would  have  only  the  value  that  comes 
from  its  commodity  functions.  In  so  far  as  credit-arrange- 
ments give  to  partial  rights  to  wealth  the  capacity  to  serve 
as  a  medium  of  exchange  or  for  other  money  purposes— 
and  this  is  true  to  a  high  degree  of  bank-credit— this  tends 
to  cut  under  the  sources  of  value  of  money.  Credit  thus, 
from  two  angles,  tends  to  raise  pricc-^,  it  raises  the  values  of 
goods;  and  it  tends  to  lower  the  value  of  money.  The 
limits  on  this,  however,  are  reached  v.hen  gold  ceases  en- 
tirely to  function  as  money,  and  when  all  items  of  value 
are  perfectly  saleable.  Then  credit  has  done  its  perfect 
work  for  prices,  and  can  do  no  more.  No  incentive  re- 
mains for  further  borrowing,  if  all  items  of  value  that  need 
to  be  exchanged  are  perfectly  saleable. 

These  theses  will  meet  objection,  particularly  from  those 
who  are  accustomed  to  quantity  theory  reasoning,  and 
who  look  upon  the  volume  of  credit  as  something  independ- 
ent of  the  volume  of  trade.  On  the  logic  of  the  quantity 
theorj'  there  is  no  reason  why  prices  might  not  mount  in- 
definitely, if  only  credit  could  increase  indefinitely.  The 
causes  controlling  the  volume  of  credit  are,  on  this  view, 
quite  independent  of  the  volume  of  trade.  I  have  given 
this  line  of  thought  sufficient  criticism,  perhaps,  in  Part  II, 
but  shall  find  occasion  to  recur  to  it  at  a  later  point  in  this 
chapter.  However,  writers  not  bound  by  quantity  theory 
ideas,  may  still  find  reason  to  question  these  theses,  and  it  is 
necessary  that  I  should  take  account  of  various  complica- 
tions, and  make  what  may  well  be  called  substantial  quali- 
fications and  modificacions,  before  the  theses  are  accept- 
able. 

First,  objection  will  be  offered  to  the  doctrine  that  all 


CREDIT 


479 


i^ 

^ 


credit  is  merely  rights  to  wealth,  that  credit  rests  on  wealth. 
It  will  be  urged  that  many  loans  are  made  without  col- 
lateral, or  mortgage  security,  that  the  "personal  credit" 
of  the  borrower  is  the  only  security,  and  the  only  basis  of 
the  loan.    This  objection  is  not  serious.    There  are,  doubt- 
less, loans  which  are  disguised  benevolences,  where  the 
lender  gets  nothing  good  in  return  for  his  loan.    1  abstract 
from  such  cases.    Quantitatively  they  are  not  important, 
and  qualitatively  they  are  not  really  commercial  transac- 
tions.    In  general,  when  a  good  merchant  borrows  at  the 
bank  on  his  personal  note,  the  bank  knows  very  well  what 
goods  he  has  in  stock,  what  prospects  he  has  for  marketing 
them,  what  other  debts  he  has,  what  his  "net  worth"  is. 
And  the  bank  knows  that  it  has  legal  claims,  even  though 
not  preferred  claims,  on  his  wealth.     When  a  young  busi- 
ness man  borrows  capital  from  a  neighbor,  giving  no  security 
because  he  has  no  marketable  wealth  which  would  serve  as 
security,  he  is,  none  the  less,  exchanging  a  valuable  right 
for  the  loan.    He  is  giving  the  lender  a  right  to  a  prefer- 
ential share  in  his  future  income.     The  lender  has  con- 
sidered the  young  man's  abilities  as  sources  of  income,  in 
conjunction  with  the  capital  lent.    Incidentally,  the  lender 
retains  rights,  preferential  rights  as  against  the  young  man 
himself,  in  the  quantum  of  value  he  has  turned  over  to  him. 
If  a  young  man  borrows  the  resources  with  which  he  buys 
a  farm,  the  lender  takes  a  mortgage  on  the  farm  itself. 
Transactions  of  this  sort  frequently  have  in  them  the  ele- 
ment of  benevolence,  and  the  considerations  are  not  always 
strictly  commercial.     In  the  case  of  a  young  man  of  unu- 
sual ability,  however,  who  insures  his  life  for  the  benefit 
of  the  lender,  such  transactions  may  be  perfectly  good 
commercial  transactions,  value  balancing  value  in  the  ex- 
change.   The  thing  traded  is  commonly  present  money  (or 
its  equivalent)  for  rights  to  future  money  income. 


Ik 


M 


I 


'  i 


•n 


4  So 


THE   VAI.rF.   OF  MONEY 


Public  loans  present  no  exception  to  our  rule.    They 
represent  the  transfer  of  jjresent  wealth  for  the  future  in- 
(ome  -.vhich  the  goxernnieut,  by  virtue  of  its  public  domain, 
or,  more  commonly,  its  taxing  power,  may  expect  to  re 
ceive.     With  a  strong  government,  this  future  income  may 
be  a  very  substantial  part  of  the  total  income  of  the  people. 
Public  loans  ma\-  often  be  for  commercial  purposes,  as 
when  municipalities  borrow  to  build  or  extend  municipal 
enterprises.     In  cases  of  this  sort,  the  market  frequently 
will  consider  the  prosi)ects  of  commercial  success  of  the 
enterprises  in   lixing  the  value  of  the  municipal  bonds. 
Where  the  proceeds  of  the  loan  are  for  non-commercial 
purposes,  as  war,  the  question  of  the  future  income  of  the 
government  will  still,  ordinarily,  be  a  dominant  factor  in 
determining  the  value  of  the  securities.     Often,  however, 
there  is  the  direct  action  of  patriotic  fervor,  etc.,  enhancing 
the  values  of  government  securities.     We  have  seen  this  in 
the  case  of  government  money.     It  is  no  part  of  our  theory 
to  maintain  that  men's  calculations  are  always  rational,  or 
that  the  whole  of  the  value  of  a  long-time  income-bearer 
rests  on  the  anticii)ated  income.     But  this  is  no  peculiarity 
of  credit  phenomena.     The  same  thing  is  true  of  lands,  for 
examp'".'.     Capital   values  often  get  independent  in  part 
of  their  "presuppositions,"  as  we  have  seen  in  the  chapter, 
sitpra,  on  "Economic  Value."     War  security  issues  often 
represent  the  effort  of  the  government- -as  at  the  present 
time—  to  bring  into  the  prtsent  every  possible  bit  of  future 
values,  as  a  means  of  increasing  their  power  in  a  desperate 
struggle.     The  high  prices  of  goods  in  such  a  situation 
represent  the  concentration  of  future  values  into  the  pres- 
ent, an  increase  in  the  motivating  power  which  stimulates 
the  people  to  unwonted  exertions.     In  war  time,  more- 
ovvv.  many  ideal  values,     those  whose  fate  is  dependent 
on  the  outcome  of  the  war— enter  into  and  increase  the 


CREDIT 


481 


values  of  those  goods  which  are  needed  for  carrying 
on  the  war.  This  leads  to  larger  sacrifices  of  future  in- 
come than  would  ordinarily  be  tolerated.  It  is  not  so 
much  a  case  of  present  goods  rising  because  of  extra 
credit,  as  of  extra  credit  because  present  goods  are  more 
valuable. 

A  second  objection  would  be  raised  that  in  many  cases, 
the  values  pledged  by  the  borrower  could  not  exist  if  the 
lender  did  not  make  the  loan.  This  would  be  particularly 
the  case  with  credit  granted  for  the  starting  of  a  new  or 
novel  enterprise,  which  as  yet  exists  only  in  idea.  The 
established  merchant,  with  goods  on  his  shelves,  or  with  a 
bill  of  lading  for  ,^oods  which  he  has  sold,  has  a  very  tan- 
gible, concrete  basis  for  a  loan,  whose  value  is  independent 
of  the  decision  of  any  given  banker.  If  my  doctrine  is  to 
be  taken  as  holding  that  all  credit  rests  on  concrete  physical 
goods,  very  many  exceptions  indeed  could  be  found.  But 
this  is  not  my  doctrine.  It  is  that  credit  rests  on  valuable 
rights.  These  rights  may  be  rights  to  existing  concrete 
goods;  they  may  be  rights  to  future  incomes.  In  any  case, 
\t  is  the  values,  rather  than  ♦.  e  physical  quantities,  that 
are  significant.  Witness  cotton  before  and  after  the  out- 
break of  the  World  War.  Ultimatel>,  in  general,-^  eco- 
nomic values  come  from  the  "primary  values"  or  "first 
order"  values  of  consumption  goods  and  cervices.  These 
values  are  reflected  back,  by  the  imputation  processes,  to 
the  various  "factors  of  production"  which  have  made 
the  existence  of  the  goods  and  services  possible,  in  accord- 
ance with  well-known  laws  which  need  not  be  here  elab- 
orated.   But  the  category  of  "factors  of  production"  is 

'I  do  not  accept  the  im|)utation  tlicory,  or  the  capitalization  ihmn , 
without  qualification,  except  as  static  first  approximations,  \alucs  of 
"factors  of  pnxiuction"  may  easily  become,  and  do  l)econie,  in  larjic  part 
independent  of  their  "presupiwisitions,"  Cj.  the  chapter  on  "Dodo-Bones", 
supra,  and  the  chapter  on  "Economic  \alue." 


If 

If 


482 


THE   VALUE   OF  MONEY 


'Ji 


J)iS. 


far  from  exhausted  when  we  have  named  land,  labor,  and 
produced  instruments  of  production!  Some  waters  have 
rejected  the  notion  of  tors  of  production"  largely  or 

altogether,  and  prefer  .d\  a  term  as  "agents  of  acquisi- 
tion." '  I  certainly  have  no  intention  to  give  to  the  term, 
factor  of  production,  any  ethical  connotation.  Even 
though  a  factor  of  production  be,  like  land  or  labor,  a  sine 
qua  non  of  production,  it  does  not  follow  that  the  owner  of 
that  factor  gets  his  proper,  or  ethically  just  share,  under 
the  laws  of  economic  imputation.  Many  of  the  "factors 
of  production."  in  the  sense  of  factor  which  derives  a  value 
from  the  economic  laws  of  imputation,  may  well  be  para- 
sitic from  the  angle  of  ultimate  social  welfare.  The  only 
test  is  as  to  whether,  under  e.xisting  social  arrangements, 
a  portion  of  the  income  of  a  given  establishment  would  cease 
to  e.xist  if  that  factor  should  disappear,  or  be  reduced. 
From  the  angle  of  this  test,  monopoly  power,  trade-marks, 
established  trade  connections,  the  big  idea  of  an  entre- 
preneur, a  dynamic  personality,  capacity  for  winning  other 
men's  confidence  and  good  will,  and  sometimes  that  brutal 
selfishness  which  makes  other  men  shrink  from  conflict,  or 
the  reputation  of  being  a  dangerous  and  vindictive  man, 
may  be  equally  "factors  of  production"  with  land.  labor, 
and  produced  instruments  of  production.  In  Part  IV  of 
this  book,  "The  Reconciliation  of  Statics  and  Dynamics," 
we  have  discussed  the  "intangible  capital  items"  of  this 
class,  and  have  indicated  that  many  of  them  perform 
really  important  and  necessary  social  functions.  Others 
are  doubtless  pernicious.  Production  involves  leadership, 
organization,  the  making  and  maintaining  of  "interstitial 
connections."  as  well  as  the  technology  of  muscle  and 
machine.    But  credit  is  based  on  values,  rather  than  on 

■  This  would  seem  to  be  Davenport's  view.    See  his  article  in  the  Quarterly 

Journal  of  Economics,  Nov.  igio. 


CREDIT  483 

concrete  goods  as  such,  and  if  these  "intangibles"  have 
value,  they  may  have  credits  based  upon  them.' 

That  some  of  these  values  exist  only  by  virtue  of  the 
fact  that  credit  is  granted  is  no  marked  peculiarity.     The 
granting  of  credit  is  an  exchange  of  the  rights  of  the 
creditor  for  rights  to  the  future  income  of  the  borrower. 
If  the  exchange  were  not  made,  in  certain  cases,  the  bor- 
rower would  have  no  future  income  to  which  he  could  give 
rights.    The  entrepreneur  with  a  big  idea  cannot  actualize 
that  big  idea  ualess  he  can  bring  it  into  conjunction  with 
land,  labor,  capital,  and  a  market  for  the  products.    The 
exchange  of  rights  to  the  value  of  the  products  for  the 
banker's  deposit-currency,  or  the  private  lender's  money 
is  merely  one  of  many  necessary  exchanges  required  to 
bring  about  the  combination  which  will  create  the  products. 
If  there  were  no  possibility  of  marketing  the  products,  he 
would  be  equally  helpless,  and  his  idea  be  equally  valueless. 
The  general  range  of  values,  under  our  present  system  of 
division  of  labor,  private  property,  private  enterprise,  etc., 
depend  on  the  possibility  of  exchange.   Men  produce  for  the 
market,  rather  than  for  their  own  consumption,  or  for  the 
consumption  of  a  communist  society.    Without  exchange, 
many  values  would  persist,  but  most  values  would  at 
least  be  diminished.    Exchange  is  part  of  the  productive 
process.     The  only  peculiarity  in  the  case  under  discussion 
is  that  the  man  getting  credit  for  the  exploitation  of  a  big 
new  idea  commonly  has  a  very  limited  market— is  depend- 
ent on  the  decision  of  one  bank  or  lender,  or  at  most  of 
one  out  of  a  few  possibilities.    The  narrower  the  market, 
the  more  dependent  are  the  values  of  things  that  must  be 
exchanged  upon  the  decisions  of  a  few  men.    Wheat  is 
free,  virtually,  from  indi\idual  caprices,  though  even  there 
a  big  operator  may  organize  a  pool  and  temporarily  affect 
'  To  a  high  degree,  "good  will,"  trade-marks,  etc.,  are  bankable  assets. 


4«4 


TiiF"  VAi.rK  or  Mor^r.Y 


the  vuluc  very  t^'rcatly.  But  the  immech'ate  power  of  a  few 
men  on  \ alius  is  iiureiisingly  great  as  we  get  closer  to  those 
ihiiigs  w  liu  h  art'  uni(Hu\  which  are  capahle  of  only  special- 
ized cniplnyinent.  and  wJiicli  call  for  the  cooperation  of 
elaborate  and  expensive  systems.  And.  of  course,  the  in- 
fluence of  individual  (aprice,  or  individual  decisions,  on  all 
\alues  grows  greater  as  wealth  and  power  are  concentrated. 
Econondc  social  value  is  an  institutional  value,  specially 
weighted  and  controlled  by  individuals,  classes  and  in- 
stitutions.' 

Josej)h  Schumpeter,  in  his  Tlieoric  dcr  'wirtscliaftlichen 
Enticicklitiii^.  has  made  much  of  the  role  of  the  banker  in 
economic  evolution.  He  sees  in  the  banker  a  creator  of 
"  Kdufkraft,"  by  means  of  which  an  entrej^reneur,  a  dynamic 
man  who  has  a  new  idea  which  he  wishes  to  actualize,  is 
able  to  wrest  from  the  unwilling  "static  economic  subjects" 
their  land,  labor  and  instrumental  goods  for  the  purpose  of 
putting  his  new  plan  through.  This  new  Kaufkraft  is  the 
true  Kapital  which  the  new  enterprise  requires.  Capital, 
thus  dehned.  is  not  an  accumulation  of  goods,  is  not  em- 
bodied in  goods.  It  is  an  agent,  a  power,  which  the  banker 
creates.  It  makes  dynamic  change  possible.  Schumpeter 
is  particularly  anxious,  in  clearing  the  way  for  his  new 
theory  of  interest,  to  get  rid  of  all  the  notions  of  saving,  ac- 
cumulations of  stocks  of  goods,  etc.,  which  have  commonly 
been  made  prominent  in  the  discussion  of  capital  and  in- 
terest.    We  need  not  here  discuss  his  theory  of  interest. - 

'  Social  Value,  191  r,  passim,  esfK'cially  ch.  XIII.  Cooley,  C.  H.,  "Insti- 
tutional Character  of  Pecuniary  Valuation,"  Am.  Jour,  of  Sociology,  Jan. 

-  Cf.  my  article,  "  Schumpeter'i  Dynamic  Economics,"  Political  Science 
Qiiartrrly,  Dec.  1915,  and  the  chapter  on  "MarKinal  Utility,"  supra.  That 
the  new  bank-credit,  without  the  painful  prdiminary  "abstinence"  which 
the  classical  economics  has  stresserl,  is  enouch  to  {provide  capital  for  a  new 
enterjirise  is,  as  .Schum|>eter  insists,  true.  Schumpeter  has  made  an  im- 
IKirtant  i ontribution  in  his  emphasis  on  this  loo  much  neglected  fK)int.    But 


CREDIT 


48s 


He  maintains  that  the  new  dynamic  credit,  credit  granted 
I)}'  a  banker  for  a  really  new  enterprise,  as  yet  not  con- 
cretely in  existence,  represents  something  new  in  the  world, 
aiiomolous  from  the  angle  of  static  \alues,  and  static  credit. 
Indeed,  he  regards  credit  as  unessential  for  the  static 
analysis,  and  banishes  it  from  the  "UV^c/z"  of  his  static 
state.  But  this  new  credit  is  different  from  such  credit  as 
there  may  be  in  the  static  state,  because,  he  holds,  the  new 
credit  does  not  rest  on  good;.,  and  has  no  Dcckung.  Schum- 
peter  himself  calls  these  doctrines  "heresies."  They  be- 
come less  dangerous,  however,  when  we  learn  that  by 
"saving"  Schumpeter  means  mere  trenching  upon  accus- 
tomed expenditure,  so  that  the  entrepreneur  who  saves  part 
of  unusual  profits  is  really  not  saving  at  all,  and  when  one 
discovers  that  his  contention  that  there  need  be  no  accumu- 
lation of  goods  prior  to  the  starting  of  a  new  enterprise 
means  merely  that  there  need  be  no  special  accumulation 
of  goods  ad  hoc.  Of  course  if  saving  means  trenching  upon 
accustomed  expenditure,  it  is  banished  by  hvpothesis  from 
the  static  state,  but  there  may  still  be  plenty  of  capital  (in 
the  ordinary  sense  of  accumulated  produced  means  of  pro- 
duction) for  Schumpeter's  entrepreneur  to  get  hold  of  by 
means  of  his  new  Kapital.  His  contentions  that  the  new 
credit  does  not  rest  on  goods,  that  it  has  no  Dcckung,  and 
that  we  have  a  new  thing  in  the  world  since  in  d>Tiamic 
credit  we  have  a  case  of  temporal  discrepancy'  between  the 

it  shuul'i  he  noted  that  this  does  not  dispense  with  curtailing  of  consump- 
tion, and  "abstinence."  It  merely  shifts  the  necessity  for  curtailing  con- 
sumption to  some  one  else.  The  new  plan  of  the  dynamic  entrepreneur,  by 
means  of  bank  credit,  draws  labor  and  capital  away  from  the  existing  static 
enterprises.  That  curtails  their  output.  That  leaves  less  goods  of  the  old 
kinds  for  jieople  to  consume.  That  means  higher  prices  for  consumption 
goods,  in  the  inter%al  between  the  starting  of  the  new  enterprise  and  the 
time  when  its  finished  products  are  added  to  the  "real  income"  of  the  com- 
mu^it^^  Extensions  of  bank  credit,  there,  shift  the  Inirdcn  of  "abstinence" 
to  the  consumer,  and  to  the  static  producer.  "  Saving"  is  still  the  source  of 
capital,  but  it  is  involuntary  saving. 


486 


THE  VALUE  OF  MONEY 


I 

m 

in-} 


»i-  !  ! 


making  of  obligations  and  the  ability  to  pay  them,  calls  for 
further  analysis. 

It  is  true  that  there  is  a  time  during  which  the  new  credit 
has  no  basis  in  concrete  goods.    Very  speedily,  however, 
the  new  credit  is  exchanged  for  concrete  goods,  and  the 
enteri)rise  is  started.    Further,  the  banker  commonly  in- 
sists  on  a  margin  at  the  start.    Fui  ;her,  the  claims  of  the 
borrower  on  the  banker  are  themselves,  prior  to  their  ex- 
penditure for  the  things  needed  in  the  enterprise,  assets  to 
which  the  banker  may  look  as  a  basis  for  his  confidence  in 
the  goodness  of  the  entrepreneur's  promise  to  pay  him. 
There  is  never  a  moment  when  the  new  credit  does  not  rest 
on  values.    The  loan  by  the  banker  to  the  borrower  is, 
essentially,  like  the  case  of  the  purchase  of  any  bearer  of 
future  incomes,  say  a  machine,  or  a  factory.    The  machine 
is,  after  all,  in  economic  nature,  merely  a  "promise"  of 
future  goods  and  future  values,  as  an  Austrian  economist 
should  be  quick  to  recognize,  and  machines  are  ahnost  as 
frequently  poor  performers  as  borrowers— indeed,  most 
commonly,  the  borrower's  inability  to  repay  comes  from  the 
failure  in  the  value  of  the  goods  which  his  physical  equip- 
ment produces.    The  raison  d'etre  of  the  new  credit  is  the 
new  values  which  have  come  into  existence:  the  new  plan 
of  the  entrepreneur,  validated  by  tJic  banker,  attains  a  value 
equal  to  the  present  worth  of  the  extra  products  which  it 
promises.    I  repeat  that  it  is  values  which  are  significant 
as  the  basis  of  loans,  that  values  are  not  all  embodied  in 
physical  goods,  and  that  value  is  essentially  a  psychological 
thing. 

The  banker's  validation  of  the  plan  may  be  an  essential 
factor  in  its  value.  Belief  is  often  an  essential  factor  in 
values.  The  new  value,  and  the  new  credit,  have  a  large 
element  oi  belief  in  them.  The  value  of  the  new  plan  rests 
proximately  in  the  belief  of  the  banker,  manifested  by  his 


CREDIT 


487 


Rranting  of  credit.  But  the  value  of  the  bank-credit  rests 
ultimately  in  the  prestige  of  the  banker,  which  is  a  fact  of 
social  psychology,  resting  in  a  massing  of  belief  on  the  part 
of  the  public  in  him,  in  the  validity  of  his  bank-notes  and 
deposit-currency,  coupled  with  support  from  legal  and 
other  institutions.  But  this  is  to  anticipate  the  discussion 
of  the  nature  of  bank-credit.  The  point  involved  is  suffi- 
ciently illustrated  by  the  case  where  a  man  who  is  not  a 
banker  lends  his  money  to  an  entrepreneur  of  a  new  under- 
taking. Here  again  the  enterprise  is  impossible  without 
the  loan.  Here  the  loan  is  made  on  the  basis  of  an  antici- 
pated income.  Here  again  the  anticipated  income  is  made 
possible  only  by  the  loan ;  one  of  the  values  that  enters  into 
the  exchange  exists  only  because  the  exchange  is  possible. 
None  the  less,  the  credit  rests  on  value.  It  is  a  right  to  an 
anticipated  income.  The  man  who  has  made  the  loan  has 
his  security  in  the  value  which  he  has  lent,  plus  the  present 
worth  of  the  extra  income  which  the  new  idea  is  expected 
to  create. 

Now  a  great  practical  difference  is  made  in  the  course  of 
economic  life  by  the  decisions  of  lenders  to  lend  to  men  who 
plan  new  things,  instead  of  to  men  who  plan  old  things.  It 
makes  an  enormous  difTerence  whether  or  not  new  plans 
appeal  to  the  imaginations  of  those  who  control  the  eco- 
nomic resources  of  society.  It  makes  a  great  difference 
whether  static  values  (the  capital  values  of  incomes  to  be 
created  in  familiar  ways)  or  dynamic  values  (capital  values 
of  incomes  to  be  created  in  novel  ways)  win  out  in  the  com- 
petition for  loans  from  those  who  have  loans  to  make.  But 
as  values,  the  two  are  of  the  same  psychological  stuff  and 
substance :  futurity  and  belief  are  essential  elements  in  both 
of  them. 

Stable  belief,  and  strong  belief,  are  easier  to  evoke  in  the 
case  of  the  established  and  the  familiar.    New  ways  of 


4S.S 


THE   VALl'i:   OF   MOXKY 


1:, 

Mil' 

m\ 


'ill 


creating  wealth  must  promise  larger  returns,  and  make 
more  dramatic  appeals  to  the  imagination,  than  old  ways. 
Schumpeter  indicates  that  it  is  the  essential  function  of  the 
banker  to  give  preference  to  the  new  ways,  that  the  mass 
of  men  are  "static"  in  their  attitude,  and  that,  for  some 
reason  which  he  does  not  clearly  indicate,  the  banker  is 
not.     This  has  not  been  our  American  experience,  on  the 
whole.     The  contrast  which  Schumpeter  makes  between 
the  timid,  static  masses,  and  the  few  highly  important 
dynamic   entrepreneurs,   holds  very   much    less    true    in 
America  than  in  Continental  Europe.     There  it  is  doubt- 
less true  that  new  industrial  enterprises  have  had  their 
main   encouragement   from   bankers.    Here,    such   enter- 
prises   have   api)ealed    largely   to    the   mass   of   men,    to 
the   investing  and   speculative  public.    Our   commercial 
banks  have  lent  largely  upon  stock  exchange  collateral, 
which  means  that,  indirectly,  bank-loans  have  gone  to 
finance  industry.     The  extent  of  this  is  enormous,  as  will 
later  appear.    However,  the  banks,  as  banks,  have  not 
been  large  buyers  of  stocks.     They  have  guarded  them- 
selves by  requiring  "margins"  from  those  to  whom  they 
have  lent  on  such  collateral.    Seasoned  bonds  have  been 
bought  in  great  volume  by  our  commercial  banks,  but  few 
stocks.    Even  the  underwriters  and  investment  bankers 
have  been  primarily  intermediaries,  expecting  to  pass  on  to 
private  buyers  the  securities  they  hold  temporarily.    My 
point  here  is,  merely,  that  there  is  nothing  in  the  distinction 
between  static  and  dynamic  credit,  when  by  that  is  meant 
the  distinction  between  credit  for  new  enterprises  and  credit 
for  old  enterprises,  to  mark  off  a  peculiar  or  essential  prov- 
ince for  bank-credit.     The  need  for  bank-credit  does  arise 
out  of  dynamic  conditions,  primarily,  but  it  is  not  the  need 
for  credit  to  slari  d\Tiamic  changes,  even  though  bank-credit 
may  do,  and  does  do,  that.     The  chief  reason  for  bank- 


CRFDIT 


480 


credit  is  to  enable  economic  society  to  readjust  itself 
quiciily  and  readily  to  dynamic  changes,  by  putting  through 
without  friction  the  necessary  exchanges  that  such  read- 
justment requires,  and  by  holding  in  licjuid  form  a  funtl  of 
rights  wh'ch  can  meet  the  emergencies  and  unexpected 
occurrence  which  dynamic  conditions  involve.  To  this 
we  now  turn. 

Bank-credit  is  the  debt  of  responsible  institutions,  pay- 
able on  demand  in  money.  It  may  take  the  form  oi"  notes, 
or  of  the  right  to  draw  checks.  Long  evolution  has  begot 
a  system  of  legal  relationships,  and  of  banking  technicjue 
which  makes  these  promises  easily  performed.  The  same 
process  of  development  has  led  to  social  reactions  toward 
banks  and  bankers  which  give  them  enormous  prestige. 
Legal  regulation,  in  the  case  of  many  banks,  requiring 
adequate  capital,  and,  in  this  country,  requiring  minimum 
cash  reserves,  have  added  to  that  prestige.  The  promise 
of  the  bank  is  commonly  so  liquid  and  saleable  that  the 
banks  are  not  called  upon  to  fulfill  it  by  the  actual  pa>'mcnt 
of  money — the  promise  alone  is  an  object  of  value  which  is 
I)erfectly  saleable,  which  runs  in  terms  of  money,  and 
which  functions  as  a  perfect  substitute  for  money  in  almost 
every  use  except  for  very  small  retail  transactions.  Even 
there,  it  is  very  much  used. 

Among  the  features  of  banking  technique  to  which  we 
must  give  especial  attention  are  the  following:  (i)  the 
banker  has  substantial  resources  of  his  own,  his  "capital," 
which  constitutes  the  "margin"  of  protection  which  he 
ofTers  to  those  who  give  him  valuable  things  in  return  for 
his  promises  to  pay  money  on  demand;  (2)  the  banker  ex- 
changes his  promises  to  pay  on  demand,  as  far  as  possible, 
for  those  things  which  have  a  high  degree  of  "liquidity," 
i.  e.,  for  those  things  which  he  can  quickly  dispose  of  for 
cash,  or  for  the  promises  of  other  bankers  which  are  the 


490 


THi:   VALUE  OF  M(XVEY 


equivak-nt  of  cash.     Farm  mortjfaKcs  are  not  j<"Ofl  assets 
for  a  bunker  to  hold  in  lar^c  amount.     They  are  lon^-term 
obligations,  with  a  very  limited  market,  and  they  will  not 
help  him  in  emerj,'encieH  to  meet  his  obligations  to  pay  on 
demand,     Agricultural   loans,  and  other  mortpage  loans 
are  made  in  considerable  volume  by  our  State  banks  and 
trust  companies.     All  classes  of  commercial  banks  make 
many  non-liciuid  loans,  as  we  shall  later  see.     But  all  of 
them  Ret  as  high  a  i)roportion  of  liquid  loans  as  they  can. 
Bills  of  exchange,  running  ten,  thirty,  sixty  or  ninety  days, 
growing  out  of  commercial  transactions  which  automatic- 
ally terminate  themselves  in  the  pa>Tnent  of  cash  or  the 
promises  of  other  bankers,  constitute  admirable  assets. 
In  return  for  these,  the  banker  may  give  his  promises 
freely.    This  is  especially  true  where  there  is,  in  the  bank- 
ing practice,  a  wide  "rediscount  market,"  in  which  he  can 
sell  these  bills  before  maturity  if  he  wishes  to  get  even  more 
liquid  assets.     Promissory  notes,  for  short  periods,  thirty, 
sixty,  or  ninety  days,  growing  again  out  of.  commercial 
transactions,  which,  like  those  for  which  the  bills  of  ex- 
change were  drawn,  automatically  bring  in  cash  or  the 
promises  of  other  banks,  are  in  many  respects  like  the  bills 
of  exchange,  even  though  the  rediscount  market  for  such 
notes  has  not  been  so  highly  developed  as  the  market  for 
bills  of  exchange  in  Europe.    Whether  such  notes  are  as 
available  for  rediscount  as  bills  of  exchange  is  a  question  of 
technical  banking  which  we  need  not  here  discuss  in  detail, 
though  I  venture  the  opinion  that  bills  of  exchange  are 
superior  decidedly  for  this  purpose,  especially  "documen- 
tary" bills.    The  element  of  personal  credit  is  commonly 
larger  in  the  promissor\'  note,  and  that  limits  the  market. 
Banking  organization,  and  particularly  our  new  Federal 
Reserve  System,  may  greatly  reduce  the  disadvantages  of 
the  promissory  note  from  this  angle,  but  it  seems  not 


CRKDIT 


49  X 


unlikely  that  the  bill  of  exchanj?c  may  be  a  factor  of  in- 
creasing importance  in  our  internal  batikinK  arrangements. 
The  general  :est,  however,  of  what  is  available  for  a  banker's 
assets  depends  on  varying  conditions,  and  is  not  to  be 
answered  by  a  simpi'  formula.  A  bank  in  a  rural  region 
which  loads  up  heavily  with  the  safest  local  bonds  is  little 
better  off  than  with  farm  mortgages.  For  neither  is  there 
a  quick  market  in  an  emergency.  A  city  bank,  near  the 
stock  exchange,  may  very  safely  buy  in  large  amounts 
highly  saleable  as  a  profitable  substitute  for  part  of  its  casti 
reserve.  Even  country  banks  may,  and  do,  safely  own 
such  bonds.  Short  loans  on  stock  and  bond  security,  con- 
stitute the  most  important  single  t>pc  of  bank-loan  in  the 
United  States,  as  we  shall  later  sec.  (?)  The  third  feature 
of  banking  technique  to  which  attention  must  be  given  is 
the  reserve  policy.  The  banker  must  keep  some  actual 
money  on  hand  (how  much  we  have  in  part  considered  in 
Part  II,  and  shall  again  discuss). 

I  shall  give  attention  to  these  points  in  what  follows. 
The  first  point  needs  little  discussion.  Large  "capital" 
for  a  bank  gives  prestige  and  security.  Some  capital  is  a 
sine  qua  non  for  a  bank  which  expects  its  notes  or  deposit 
currency  to  have  general  acceptability. 

It  will  be  well  to  consider  further  the  circumstances 
determining  the  form  which  a  bank's  assets  shall  take. 
Though  commercial  banks  own  enormous  quantities  of  high 
grade  bonds,  it  is  rare  for  commercial  banks  in  America  to 
buy  stocks  of  corporations.  ^  They  will  often  lend  to  owners 
of  such  stocks  with  the  stocks  as  collateral,  up  to  a  high 
percentage  of  the  value  of  the  stocks,  but  they  will  rarely 
trade  their  demand  obligations  for  the  stocks  directly.     In 

'In  I0I2.  the  First  National  Bank  of  Nrw  York  owned  43  millions  of 
bonds,  but  no  stocks.  Report  of  Pujo  Committee,  Feb.  28,  1913,  p.  66. 
The  National  City  Bank  had  33  millions  in  bonds,  but  no  stocks.  Ibid., 
p.  72.    State  banks  own  few  stocks;  trust  companies  own  a  good  many. 


492 


THE  VALUE  OF  MONEY 


?!    ;    i 


!  .  i 


1:1 


general,  a  bank  wishes  to  have  its  assets  in  the  form  of 
obligations  of  other  people,  expressed  in  terms  of  dollars, 
and  having  a  definite  term  to  run  (or  callable  on  demand). 
One  reason  for  this  is  a  bookkeeping  reason.  "Par  value" 
of  stocks  has  little  meaning  any  more.  Market-prices  of 
stocks,  even  the  best  stocks,  are  not  absolutely  fi.\ed.  They 
fluctuate,  even  though  within  narrow  limits.  This  fact 
{)resents  complications  to  the  bookkeeper!  Of  course,  the 
bank's  buildings  and  fixtures,  listed  among  its  assets,  fluc- 
tuate also,  in  value,  and  in  the  price  that  could  be  obtained 
on  a  given  day.  but  the  bookkeeper  can  abstract  from  that, 
since  the  bank  has  no  intention  uf  selling  its  buildings  and 
fixtures.  The  notes  and  bills  held  in  the  bank's  portfolios 
also  in  fact  fluctuate  in  value,  and  in  the  price  at  which 
they  might  be  sold  on  a  given  day,  but  they  are  expressed 
in  terms  of  dollars,  and  the  bookkeeper  commonly  has  no 
need  to  look  beyond  the  figures  written  on  them.  At  irreg- 
ular intervals,  a  small  percentage  of  them  may  be  marked 
off  the  books  as  "bad,"  but  usually  the  minor  fluctuations 
are  abstracted  from.  The  bank  does  not  like  to  have  assets 
whose  published  prices  fluctuate.  But  this  is,  I  suppose, 
not  the  main  objection  which  banks  have  to  stocks  as  assets 
since  it  does  not  prevent  their  buying  bonds.  I  abstract 
from  the  legal  restrictions  that  prevent  many  banks  from 
buying  stocks.  The  fundamental  reason  is  to  be  found 
elsewhere.  The  point  is  to  be  found  here:  the  transaction 
whereby  property  rights  in  roadbed,  rolling  stock,  etc., 
were  collected  into  property  rights  in  a  going,  organic 
whole  increased  the  saleability  of  all  these  rights;  the  further 
subdivision  of  these  rights  into  many  thousands  of  equal 
parts  enormously  increased  the  saleability  of  these  rights, 
esneciall>'  when  coupled  with  listing  in  an  organized  market; 
the  further  transaction,  by  which  a  preferential  claim  upon 
these  subdivisions  of  rights  is  embodied  in  a  collateral  note 


CKEDIT 


493 


still  further  increases  the  saleability  of  the  value  of  these 
rights.  The  whole  vi  the  value  embodied  in  a  share  of 
stock  has  not  the  certainty  and  saleability  which  a  banker 
wishes  for  his  assets.  It  might  not  be  possible  to  market 
the  stock  on  a  given  day  without  loss.  But  a  collateral 
note,  embodying  So'J^"  of  that  value,  with  provision  for 
additional  collateral  in  case  the  margin  is  reduced,  is  highly 
liquid  and  the  banker  hcs  no  doubt  that,  with  watchfulness, 
he  can  always  realize  the  full  face  value  of  such  a  note.  It 
becomes  saleable  enough  for  his  purposes.  The  transac- 
tion by  which  this  note  is  exchanged  for  the  banker's  de- 
mand obligation  gives  the  drawer  of  the  collateral  note  a 
perfectly  saleable  form  of  value  with  an  almost  universal 
market,  which  he  can  convert  without  loss  into  practically 
anything  that  money  can  buy.  We  have  here  a  series,  a 
scale,  saleability  of  rights  growing  steadily  greater,  through 
a  series  of  transformations  and  exchanges,  till  at  last  the 
virtually  perfect  saleability  is  reached.  Again  we  are  re- 
minded of  Mengcr's  analysis  *  of  the  methods  of  primitive 
barter,  whereby  the  man  who  possesses  a  good  of  low  sale- 
ability,  through  successive  exchanges,  gradually  gets  goods 
of  higher  and  higher  saleability,  until  he  finally  reaches  his 
goal.  Bank-credit,  this  most  higl  iy  saleable  of  all  forms  of 
rights  except  the  rights  to  actual  money  in  hand,  and  in 
general  not  inferior  to  money,  ca.mot  usually  be  had  by 
direct  offer  to  the  bank  of  crude  property  rights.  These 
must  be  refined  and  distilled,  till  a  central  core  of  highly 
saleable  value  emerges,  and  then  they  ma^  enter  the  bank's 
assets  in  return  for  bank-credit.  The  best  bonds  likewise 
offer  such  a  central  core  of  highly  saleable  value. 

A  further  point  is  to  be  noticed  about  this  scale  of  sale- 
abilities.  At  each  stage  of  the  exchanges  of  less  saleable 
for  more  saleable  rights,  the  holder  of  the  less  saleable 

'  Cf.  the  chapter  on  "The  Orig-n  of  Money,"  supra. 


i  ■  I 


494 


THE  VALUE  OF  MONEY 


i 


■i--.  t 


rights  must  rrake  concessions  to  the  holder  of  the  more 
saleable  rights.    And  the  degree  of  his  concession  is,  in 
general,  correlated  with  the  lack  of  saleability  of  what  he 
offers.    Commonl>-  this  takes  the  form  of  giving  up  a  right 
which  has  a  higher  yield  for  one  which  has  a  lower  yield. 
Or,  viewed  more  fundamentally,  from  the  angle  of  the 
capitalization   theory,  income-bearers  of  low  saleability 
are  capitalized  at  a  higher  discount  rate  than  income-bearers 
of  higher  saleability,  with  the  same  yield.    Farm  lands 
may  be  capitalized  on  a  io%  basis.     (There  will  be  great 
differences  between  regions  m  this,  depending  in  consider- 
able measure,  often,  on  the  activity  of  farm  sales.    I  would 
refer  here  to  the  facts  mentioned  in  my  chapter  on  "The 
Quantity  Thtv^ry  and  International    Gold   Movements," 
contrasting  Cass  Co.,  Iowa,  with  Yazoo  Co.,  Mississippi. 
Of  course,  the  risks  of  agriculture  count  heavily,  also,  and 
the  prestige  of  owning  land  as  compared  with  other  forms 
of  property.)    The  farmer's  mortgage  note  may  bear  7%. 
A  merchant  who  holds  that  note  may  use  it  as  collateral, 
with  a  margin,  backing  his  own  note,  and  get  accommoda- 
tion for  three  months  at  6%.    The  bank  may  rediscount 
the  note  of  the  merchant,  giving  it  its  own  endorsement,  on 
a  4H%  basis.    The  coal  mine  owned  by  a  small  company 
may  yield  12%;  sold  to  a  large  iron  company,  which  com- 
bines mining  and  smelting  and  manufacturing,  that  mine 
may  be  represented  by  f/o  stock;  a  collateral  loan,  for 
sixty  days,  based  on  80' ^  of  the  value  of  the  stock  may  be 
had  for  4%;  the  demand  liability  of  the  bank  given  in  ex- 
change for  the  collateral  note  will  either  yield  nothing  at 
all,  or  else  yield  a  low  per  cent,  one.  one  and  a  half,  or  2%, 
on  large  checking  accounts.    If  the  collateral  note  be  a  call 
note,  the  rate  will  be  lower,  in  general,  than  on  a  time  note. 
I  here  refer  to  what  was  said  in  the  chapter  on  the  functions 
of  money  with  reference  to  the  relation  of  short  loans,  es- 


CREDIT 


495 


pecially  call  loans,  to  the  "bearer  of  options"  function  of 
money.  Part  of  the  yields  of  these  loans  is  in  the  bearing 
of  options.  This  function  grows  out  of  the  uncertainties 
of  a  dynamic  market.  It  would  disappear  if  uncertainties, 
"friction,"  and  dangers  disappeared. 

The  importance  of  liquidity  and  saleability  in  the  assets 
of  a  banker  needs  little  discussion.  It  has  been  reiterated 
by  virtually  every  writer  on  the  subject.  Its  connection 
with  the  need  for  meeting  demand  obligations  is  obvious. 
The  point  that  I  would  here  emphasize  is,  however,  that 
this,  too,  grows  out  of  dynamic  changes,  uncertainties,  etc. 
An  economic  life  in  "normal  equilibrium,"  in  static  balance, 
with  all  things  going  smoothly,  in  anticipated  ways,  could 
dispense  in  large  measure,  or  wholly,  with  such  liquidity. 
Obligations  which  matured  at  the  time  that  the  holders  of 
the  obligations  had  maturing  obligations,  would  serve  their 
purpose  perfectly.  Again  I  would  emphasize  the  fact  that 
the  theory  of  money  and  bank-credit  is  essentially  a  dy- 
namic theory,  and  that  the  notion  of  "normal  equilibrium" 
which  underlies  the  quantity  theory  has  no  bearing  what- 
ever on  these  fundamental  matters. 

The  market  where  fluid  bank-credit  is  exchanged  for  less 
fluid  rights  has  been  given  the  name,  "  the  money  market." 
The  prices  fixed  in  this  market  are  "money-rates,"  figured 
as  percentages  on  the  amounts  of  bank-credit  exchanged 
for  the  less  fluid  rights.  It  is,  of  course,  strictly  speaking, 
not  a  money  market.  Money,  as  the  term  has  been  used 
in  this  book,  has  been  taken  to  mean  gold  coin,  subsidiary 
coin,  govenunent  paper,  and  for  the  United  States,  bank- 
notes. In  a  country  where  much  bank-credit  is  elastic 
bank-notes,  it  is  better  to  distinguish  money  from  bank- 
notes. The  term ,  money,  is  not  one  easily  defined  in  a  logical 
manner.  A  good  logical  definition  should  seize  on  some 
essential  characteristic  of  the  object  defined,  should  in- 


496 


THE   VALUE   OF   MONEY 


!  i  ! 


f  i  '  : 
t'.  s 


111 


pi  I 


elude  all  the  objects  of  that  class,  and  should  exclude  all 
others.    We  can  meet  the  tests  of  indusiveness  and  exclu- 
siveness  in  a  definition  of  money,  hut  we  tan  hardly  meet 
the  first  test.     The  differences  between  gold  money,  for  e.x- 
ample,  and  gold  bullion  are  less  than  the  differences  between 
gold    money    and    government    paper.      The    differences 
between  bank-notes  and  bank-deposits  are  less  than  the 
differences  between  bank-notes  and  government  paper,  or 
bank-notes  and  gold.     The  term,  money,  covers  a  group  of 
more  or  less  miscellaneous  things,  concerning  all  of  which  few 
general  laws  are  possible.     Gold,  or  other  standard  money, 
in  particular,  may  obey  different  laws  from  other  forms  of 
money.     I  have  been  careful,  in  the  foregoing,  to  avoid 
the  danger  of  letting  the  argument  rest  on  any  ambiguity 
in  the  meaning  of  the  term,  however,  and  for  the  present 
shall  not  attempt  further  definition.     For  the  prescm,  we 
shall  use  the  term,  "money  market,"  in  its  familiar  sense, 
as  meaning  that  market  in  which  bank-credit  is  exchanged 
for  less  fluid  rights.    An  organized  money  market  com- 
monly appears  only  in  larger  cities.     In  smaller  places, 
relationships  between  banks  and  customers  are  much  more 
personal,  and  indeed,  even  in  larger  cities,  regular  business 
houses  have  particularly  intimate  relations  with  special 
banks.    A  fluid,  impersonal  market,  to  which  men  may 
rep  ir  without  reference  to  anything  but  the  marketability 
of  the  collateral  they  have  to  offer,  is  a  distinctively  metro- 
politan affair.     Only  large  dealers  commonly  have  relations 
with  more  than  one  or  two  banks.    Larger  houses  in  the 
big  cities  often  do  sell  their  "commercial  paper"  through 
brokers,  and  some  of  the  big  New  York  mercantile  houses 
have  had  their  paper  scattered  a  good  deal  throughout  the 
country.    The    lack   of   protection   which   houses   which 
sought  such  credit  faced  during  the  Panic  of  igo;  tended  to 
check  the  practice  in  some  measure,  but  it  has  revived,  and 


CREDIT 


497 


even  increased.*  In  the  matter  of  a  wide  market  for  com- 
mercial paper,  however,  an  impersonal  market,  with  great 
fluidity,  we  are  well  behind  not  only  England,  but  also 
Continental  Europe.  The  London  acceptance  house  has 
especially  contributed  to  an  impersonal  market.  The 
American  money  market  is  par  excellence  a  New  York 
market,  and  the  primary  type  of  paper  discounted  in  the 
American  money  market  is  stock  exchange  paper,  and 
foreign  bills  of  exchange.  For  commercial  paper,  however, 
there  are  innumerable  more  personal,  more  restricted, 
markets,  and  commercial  paper  constitutes  a  very  consider- 
able part  of  banking  assets,  though  much  less  than  is  often 
supposed.    But  this  we  shall  discuss  in  the  next  chapter. 

'  In  March,  1916,  one  of  the  largest  banking  houses  in  Boston  informed 
the  writer  that  over  one-fourth  of  its  notes  and  discounts  (including  all 
forms  of  loans)  had  been  bought  through  note-brokers. 


: '  1 


CHAPTER  XXIV 

CREDIT— BANK  ASSETS  AND  BANK  RESERVES 

^  In  traditional  discussions  of  banking,  the  impression  is 
given  that  commercial  paper  is  the  normal  and  dominant 
t>pe  of  banking  assets.'  To  one  accustomed  to  this  view, 
the  figures  of  the  Comptroller  of  the  Currency  for  banking 
investments  in  the  United  States  for  22,491  banks  of  all 
kinds  (State,  national,  private,  and  savings  banks,  and  trust 
companies)  in  1909,2  will  occasion  dismay: 

(000,000  omitted) 

Loans  on  real  estate $  2,505 

Loans  on  other  collateral  security ^[gy^ 

Other  loans  and  discounts ^'gzi 

Oxerdraf ts '  g. 

United  States  bonds -g^ 

State,  county  and  municipal  bonds i^ogi 

Railroad  Ixmds  and  stocks i^jgo 

Bonds  of  other  public  service  corijorations '466 

Other  stocks,  bonds,  etc jq. 

Due  from  other  banks  and  bankers 2,562 

Real  estate,  furniture,  etc ~aa 

Checks  and  other  cash  items 4,- 

Cash  on  hand i  41:2 

Other  resources jjj 


Total  Resources 821,095 

These  figures,  however,  call  for  further  analysis.  They 
include  figures  from  institutions  which  should  not  be 
counted  with  commercial  banks.    The  percentage  of  real 

'  (■'/■>  e.  g.,  pp.  135(1.  of  Scott's  excellent  Money  and  Banking,  Rev  ed 
Xew  \ork,  1910.  '' 

=  The  jear  lyog  is  chosen,  in  order  that  comparison  may  be  more  readily 
made  with  tho  fifriirc-  of  Dean  Kiniey's  investigations  based  on  reported 
fle|x)sits  made  on  March  16  of  that  \ear.  The  liRures  quoted  are  taken  from 
I).  i<)  of  the  Report  of  the  Comptroller  for  1913. 

498 


CREDIT— BANK  ASSETS  AND  BANK  RESERVES         499 

estate  loans,  especially,  is  too  high  to  represent  the  work- 
ings of  commercial  banks,  a  very  high  percentage  of  real 
estate  loans  being  held  by  stock  and  mutual  savings  banks. 
The  other  items,  however,  are  not  much  changed  by  the 
inclusion  of  savings  banks  and  private  banks.  It  will  be 
well  to  draw  some  conclusions  from  these  aggregate  figures 
for  all  classes  of  institutions,  before  taking  up  a  more  de- 
tailed analysis  of  State  and  national  banks,  and  trust  com- 
panies. 

Where,  among  these  items,  does  one  find  "commercial 
paper  "?    In  the  reports  of  the  metropolitan  papers,  giving 
daily  variations  in  interest  rates,  it  is  usual  to  find  "com- 
mercial paper"  listed  as  a  separate  category,  coordinate 
with  "sixty  day  paper,"  "ninety  day  paper,"  etc.    Recent 
periodical  discussion  has  gone  elaborately  into  the  question 
as  to  what  should  be  called  "commercial  paper,"  from  the 
standpoint  of  the  policy  of  the  Federal  Reserve  Banks. 
I  think  it  safe  to  say  that  no  two  markets,  at  present,  in  the 
United  States  will  use  the  term  in  precisely  the  same  way, 
and  that  all  would  restrict  the  term  to  a  small  portion  of 
the  "other  loans  and  discounts"  listed  above.    The  most 
general  definition  of  "commercial  paper"  would  be  paper 
bought  through  note-brokers.    Despite  the  decided  in- 
crease in  loans  and  discounts  which  our  war  prosperity  has 
involved,  there  has  been  very  frequent  complaint  of  the 
scarcity  of  "commercial  paper."    I  shall  use  the  term, 
"commercial  paper"  in  a  much  more  liberal  sense  than  the 
American  money  market  does,  and  shall  mean  by  it  all 
loans  of  a  really  liquid  character,  made  by  banks  to  mer- 
chants and  others  to  pay  for  the  purchase  of  goods  in  antici- 
pation of  a  resale  within  the  term  of  the  loan  which  will 
enable  the  loan  to  be  repaid  at  maturity.    From  this 
should  be  excluded,  however,  loans  made  to  speculators. 
With  this  liberal,  and  not  very  precise,  definition  of  com- 


500 


THE  VALUE  OF  MONEY 


J 

m 


mercial  paper,  we  raise  again  the  question  as  to  where  it  may 
be  found  in  the  items  above  given. 

Virtually  all  of  it,  I  think,  must  be  found  in  the  item, 
"other  loans  and  discounts"  an  item  which,  in  all,  is 
slightly  less  than  23%  of  total  banking  assets.'  But  not 
all  of  this  "other  loans  and  discounts"  is  commercial  paper. 
Very  much  indeed  represents  loans  of  a  non-liquid  charac- 
ter, regularly  renewed,  which  manufacturers  and  others 
have  put,  not  into  moveable  goods,  but  into  fixed  forms  of 
capital-goods,  as  machinery,  and  even  buildings.  One  case 
in  New  York,  which  the  writer  is  informed  by  a  business 
man  well  acquainted  with  both  banking  and  business  in 
many  sections  of  the  countr}'  is  t>j)ical  of  many  cases,  is  as 
follows:  a  New  York  bank  is  at  present  lending  to  a  small 
manufacturer  of  automobile  supplies  about  $30,000.  Of 
this,  about  Sio,ooo  is  liquid,  periodically  covered  by  "bills 
receivable,"  and  if  the  bills  receivable  should  fail,  in  the 
period  in  question,  to  cover  the  Si 0,000,  the  bank  would 
insist  on  a  reduction  of  the  loan.  The  remaining  $20,000, 
however,  is  not  liquid.  It  was  spent  for  non-moveable 
equipment;  the  bank  expects  to  renew  the  notes  for  this 
loan  periodically,  and  is  well  aware  that  it  could  not  force 
collection  without  bringing  the  business  to  a  close — or  else 
forcing  the  factory  to  get  accommodation  elsewhere.  The 
$10,000  that  is  liquid  is  by  no  means  all  spent  for  goods, 
but  is  spent,  in  part,  for  wages.  None  of  the  $10,000  is 
spent  for  goods  which  are  to  be  resold  without  being  trans- 
formed by  manufacture.  None  of  the  $30,000,  therefore, 
is,  in  the  strict  sense,  "commercial  paper."  It  is  manu- 
facturer's paper.  Part  of  it  is  virtually  as  liquid  as  com- 
mercial paper;  two-thirds  of  it  is  not  liquid.    • 

'  Even  excluding  the  item  "due  from  other  lianks  and  bankers."  as  repre- 
senting duplications,  the  item  "other  loans  and  discounts"  remains  ap- 
proximately only  one-fourth  of  total  banking'  assets. 


CREDIT— DANK  ASSETS  AND  BANK  RESERVES         50I 

A  very  large  part  indeed  of  bank-loans  are  of  this  char- 
acter.   A  large  part  of  the  loans  made  to  farmers  are  in  no 
sense  liquid:  when  the  loan  is  made,  for,  say,  six  months.' 
it  is  perfectly  understood  by  both  bank  and  borrower  that  a 
renewal  will  be  asked  for  and  granted.     It  is  impossible  to 
say  what  fraction  of  this  $4,821,000,000  of  "other  loans 
and  discounts"  is  really  liquid  commercial  paper,  or  liquid 
paper  of  any  kind,  in  the  sense  that  it  can  be  automatically 
paid  off  at  maturity.     I  venture  the  statement  with  entire 
confidence,  however,  that  the  proportion  of  liquid  paper  is 
not  one-half  of  the  amount.    I  should  question  if  more 
than  one-fourth  of  it  is  truly  liquid,  in  the  sense  in  which 
that  term  is  commonly  used:  meaning  that  the  loan  is  made 
to  put  through  a  transaction  which  will  be  completed  during 
the  term  of  the  loan,  and  permit  the  loan  automatically  to 
be  paid  off.    I  do  not  mean  by  this  merely  that  the  banks 
could  not  reduce  this  item  by  one-fourth  suddenly.    Even 
in  a  market  made  up  wholly  of  highly  liquid  paper,  an 
arbitrary  refusal  to  renew  one-fourth  of  the  loans,  with  the 
effort  to  reduce  loans  and  discounts  by  one-fourth,  would 
occasion  great  embarrassment  and  even  disaster.    The 
test  of  liquidity  here  applied  relates  to  the  items  separately, 
on  the  assumption  that  other  things  are  not  radically 
changed.    Even  in  this  sense,  however,  viewing  each  loan 
transaction  separately,  it  may  well  be  questioned  if  the 
banks  in  the  United  States  could  find  among  their  "other 
loans  and  discounts"  items  exceeding  a  fourth  of  the  total 
(in  value)  which  they  could  refuse  to  renew,  at  least  in  large 
part,  without  disappointing  reasonable  expectations,  and 
embarrassing  good  business  men.^ 

'  Almost  all  agricultural  processes  require  more  than  six  months  from  their 
inception  to  the  marketing  of  the  product. 

'  This  \-iew  wouid  seem  to  correspond  with  the  view  of  Babson  and  May 
{Commercidl  Paper,  igij),  and  of  W.  A.  Scott  ("Investment  vs.  Commer- 
cial Banking,"  Proceedings  of  Investment  Bankers'  Association  of  America, 


502 


THE  VALUE  OF  MONEY 


T: 


M 


r 


Of  this  paper,  not  truly  liquid,  no  doubt  a  good  deal  is 
advanced  to  wholesale  and  retail  merchants,  and  is,  in  this 
sense,  commercial  paper.  The  terms,  "liquid  paper"  and 
"commercial  paper"  by  no  means  run  on  all  fours!  As 
will  later  appear,  the  bulk  of  liquid  banking  assets  are  not 
commercial  paper  at  all.  And  only  that  part  of  a  bank's 
loans  to  a  merchant  may  be  called  "liquid"  which  can  be 
paid  off  by  the  merchant  without  disappointing  his  reason- 
able expectations,— causing  him  to  seek  other  banking 
connections. 

There  is,  however,  another  item  in  which  we  may  find 
some  commercial  paper,  and  this  is  the  item,  "loans  on 
other  collateral  security."  This  has  commonly  been  sup- 
posed to  be  virtually  all  stock  exchange  loans.  Thus, 
Conant '  cites  the  growth  in  this  item  in  New  York  as  evi- 
dence of  the  growth  of  loans  on  stocks  and  bonds.  For 
New  York,  loans  on  stocks  and  bonds  do  make  up  the  great 
bulk  of  this  item.  Even  in  New  York,  however,  there  are 
other  factors  in  it,  absolutely,  even  though  not  relatively, 
important,  and  in  the  country  outside,  the  other  elements 
are  not  at  all  negligible,  even  though  for  the  outside  country 
the  part  secured  by  stocks  and  bonds  is  the  major  part,  and 
even  though  the  growth  of  this  item  in  our  total  banking 
assets  is,  in  general,  fairly  indicative  of  the  growth  of  loans 
secured  by  stocks  and  bonds.  Figures  for  the  ot  her  items 
are  not  available  for  State  banks,  trust  companies  or  sav- 
ings and  private  banks.  They  are  not  till  very  recently 
available  for  national  banks.  In  191 5,-  however,  the 
Comptroller  separates  the  item,  "loans  on  other  collateral 

iQi,?,  pp.  81-84).  Hoth  of  thise  discussions  appear  in  Moulton,  Monry  and 
Banking,  Pt.  II,  pp.  70  and  75-77-  I>r-  /•  K.  Pofw  considers  the  view  cor- 
rect. On  the  other  hand,  Professor  O.  M.  W.  Sprague  thinks  the  "other 
loans  and  tiiscounts"  of  large  city  banks  are  more  liquid  than  my  statement 
would  indicate. 

'  Principles  of  Money  and  Banking,  II,  p.  52. 

-  Report  of  the  Comptroller  of  the  Currency,  \ol.  II,  pp.  145  ct  seq. 


CREDIT— BANK  ASSETS  AND  BANK  RESERVES         503 

security,"  for  national  banks,  into  two  parts,  (i)  loans  "se- 
cured by  stocks  and  bonds"  ($1,750,597,273),  and  (2)  loans 
"secured  by  other  personal  securities,  including  merchan- 
dise, warehouse  receipts,  etc."  ($882,749,812).  Is  there 
any  commercial  paper  in  this  last,  not  inconsiderable,  item? 
Let  us  locate  the  item,  in  the  effort  to  find  out.  The 
percentage  runs  highest  in  Chicago,  where  this  class  of  col- 
lateral loan  exceeds  the  loans  on  stocks  and  bonds.  The 
inference  is  strongly  suggested,  therefore,  that  much  of  it, 
there,  at  least,  represents  advances  to  live-stock,  grain  and 
produce  traders  and  speculators  on  the  Board  of  Trade,  at 
the  stock  yards,  etc.  The  inference  is  strengthened  by 
the  fact  that  St.  Louis,  where  there  is  a  good  deal  of 
grain  and  commodity  speculation,  shows  more  than 
twice  as  much  of  this  kind  of  paper  as  does  Boston, 
where  this  kind  of  speculation  is  unimportant— despite 
the  fact  that  Boston's  aggregate  collateral  loans  of  all 
kinds  greatly  exceed  such  loans  in  St.  Louis.  In  New 
York,  where  there  is  a  great  deal  of  coffee  and  cotton 
speculation,  and  some  other  commodity  speculation,  the 
amount  of  this  paper,  though  relatively  small,  is  abso- 
lutely greater  than  in  any  other  city.  No  doubt,  in  New 
York,  which  is  the  country's  centre  for  foreign  commerce,  a 
fair  amount  of  the  paper  secured  by  "other  personal  securi- 
ties, including  merchandise,  warehouse  receipts,  etc.,"  is 
really  commercial  paper,  representing  advances  to  importers 
and  exporters— though  the  difficulties  of  giving  this  kind  of 
security  where  goods  are  in  transit  would  prevent  most 
of  our  foreign  trade  being  financed  in  this  maimer.  The 
total  of  this  kind  of  paper  in  New  York  -all  these  figures 
are  for  national  banks  alone — was  only  113  millions  on 
June  23,  191 5.*    It  may  be  doubted  if  very  much  of  this 

'  ToUl  collateral  loans  in  New  York  City  on  that  date  were  $7io,327.SQ6- 
This  is  for  national  banks  alone.   Report  oj  Comptroller,  1915,  II,  144-   There 


504 


rHK   \  \\.\  ^    <Mj    MuNKY 


!  IS 


paper,  in  the  grcal  titics,  rt  presents  >,'t>o(|>  in  transit.  With 
the  caution  that  the  view  here  . Apressed  is  based  on  in- 
ference, and  not  on  actual  knowlcnijje  <>i  what  the  iarjie 
city  banks  are  doing,  the  writer  ccmcludes  that  probably 
the  bulk  t)l  this  pa[)er,  in  larm-  citie>,  represents  U)an>  to 
speculators  rather  than  U»  nnTchant^.  It  is  liquid,  but  it 
is  not  commercial  paper. 

What  of  such  paper  in  the  country  ilistr-cts?  Nearly 
one-half  S4.;6,ooo.cxx>  out  of  .$88j,cxx).ooo  -of  these  na- 
tional bank-loans  on  "other  personal  security,  includinj^ 
merchandise,  warehouse  receipts,  etc.,"  are  in  the  country, 
outside  the  Reserve  and  ("eirnral  Reserve  Cities.  Much  of 
it  is  in  the  South.  Much  tH  it  in  the  j^rain  and  live-stock 
producing  regions.  What  <t*)  such  loans  mean?  '  Much 
of  it  is  loans  to  farmers  and  planters  In  the  South,  much 
of  it  is  on  crop  liens.  The  loans  on  cotton  warehouse  re- 
ceipts, at  least  in  the  country  parts  of  the  South,  are  not  as 
great  as  is  commonly  supposed.  In  ine  Xorth  and  West, 
there  arc  a  great  mass  of  farmer>'  chattel  mortgage  loans, 
including  loans  on  horses,  grain  in  cribs,  hogs,  sheep,  cattle, 
mules,  etc.  The  use  of  this  type  of  jjaper  for  linancing  the 
breeding  and  feeding  of  live-stock,  j)articulariy  hogs,  cattle 
and  sheep,  is  ver}-  extensive.  Virtually  all  loans  to  farmers 
and  feeders  for  these  purposes  are  secured  by  such  chattel 
mortgages.  It  seems  improbable  that  a  great  deal  of  this 
paper  could  represent  ordinary  commerce.  Neither  whole- 
salers nor  retailers  can  easily  handle  men  handise  on  which 
chattel  mortgages  have  been  given.  The  usual  method  of 
granting  credit  to  them  is  to  ad\ance  loans  on  one  and 


is  f\ery  reason  to  supiMJSO  that  if  trust  comjmnic's  and  |>riviite  banks  were 
iniliiclcil,  the  proportion  of  stock  c.\chun);e  loiialiral  loans  would  l)e  xcry 
mill  li  higher. 

'  I  am  very  fortunate  in  havinn  the  \iews  of  Dr.  J.  I!.  Pope  on  this  ques- 
tion. I  know  no  one  whose  knowledge  of  agricultural  credit,  whether  of 
.\merican  or  of  Kuro[x;an  conditions,  is  so  thorough  and  extensive. 


CRFDIT— BANK   ASSETS   AND   HANK    RESERVES 


50s 


two  name  paper,  unstrurod.  Not  many  loans  to  re- 
tailtrs  and  \vh«)k'salt'rs  will  fall  in  the  calt-jjory  under 
discussion, 

To  what  extent  are  the  loans  of  this  type  to  farmers 
liquid?  W  ell,  the  crop  lien  loans  in  the  South  have  a  nat- 
ural term,  and,  though  commonly  longer  loans  than  bankers 
have  in  mind  when  speaking  of  licjuid  paper,  are  liquid  in 
the  sense  that  ihcy  are  automatically  paid  off  at  maturity. 
Loans  on  work-animals  need  not  have  a  natural  term. 
Loans  on  animals  being  fed  for  the  market  have  such  a 
natural  term,  and  are  truly  liquid.  Loans,  however,  on 
l)reeding  animals  are  not  thus  liquid,  such  loans  are  com- 
monly regularly  renewed  at  maturity,  and  the  banks  do 
not  count  on  them  in  emergencii-s.  Tt  is  the  opinion  of  Dr. 
J.  L.  Pope  that  fully  two-thirds  of  the  aggregate  loans  on 
live-stock  chattel  mortgage  security  are  to  breeders  rather 
than  to  feeders,  and  hence  are  not  liquid.  Of  course,  none 
of  these  loans  are  commercial  paper. 

I  conclutle,  therefore,  that  the  thesis  with  which  wc 
started  that  the  overwhebning  bulk  of  commercial  paper  is 
to  be  fountl  in  the  item,  "other  loans  and  discounts"  is 
correct.  1  see  no  reason  to  suppose  that  an  analysis  of  the 
loans  of  State  bunks  and  trust  companies  would  show  a 
different  conclusion.  We  lack  the  figures  for  breaking  up 
the  collateral  loans  of  State  banks  and  trust  companies  into 
the  two  classes,  "secured  by  stocks  and  bonds"  and  "se- 
cured by  other  personal  securities,  including  warehouse  re- 
ceipts, merchandise,  etc."  We  have  merely  the  gross 
figures  for  collateral  loans.  As  the  State  banks  are  in  large 
degree  country  banks,  it  is  probable  that  the  percentage  of 
commodity  collateral  as  compared  with  stock  e.xchange  col- 
lateral for  State  banks  would  be  larger  than  for  national 
banks.  However,  the  total  of  collateral  loans  for  State 
banks  is  relatively  small^ssQ  millions,  for  i'}oq,  as  against 


So6 


THE  VALUE  OF  MONEY 


M 


li '  ■ 


"other  loans:..  ounts"  for  State  banks  in  that  year  of 

I.1I2  millions,  ami  as  against  a  total  of  collateral  loans  of 
all  banks  reporting  in  that  year  of  3,975  millions.  On  the 
other  hand,  the  collateral  loans  of  the  trust  companies  are 
very  large:  1.222  millions  for  1909,  as  against  "other  loans 
and  discounts"  for  the  trust  companies  in  the  same  year  of 
460  millions.  As  the  trust  companies  are  chiefly  city  insti- 
tutions, and  as  the  concentration  of  trust  company  loans 
and  capital  in  New  York  City  is  relatively  very  great,  it 
would  seem  pretty  clear  that  taking  both  State  banks  and 
trust  companies  into  account  would  substantially  lessen  the 
percentage  of  loans  "secured  by  other  personal  security, 
including  merchandise,  warehouse  receipts,  etc.,"  to  total 
collateral  loans.  As  the  amount  of  commercial  paper  in 
this  class  of  loans  for  national  banks  is  probably  small,  it 
may  be  expected  to  be  still  smaller  in  the  aggregate  of  col- 
lateral loans. 

The  following  figures,  for  State  and  national  banks,  and 
trust  companies,  only,  will,  in  the  light  of  the  foregoing, 
give  us  basis  for  some  further  conclusions  regarding  the 
character  of  banking  assets  in  the  United  States.  As  be- 
fore, the  year  1909  is  chosen: 

(000,000  omittwl)  ' 

State 
Resources  Banks 

Real  estate  loans 414. . 

Collateral  loans 559  • 

.•Ml  other  loans 1,112. 

U.S.  bonds 5 , 

State,  county  and  municipal  bonds.  ...      65. 

Railway  stocks  and  bonds 75, 

Bonds  of  other  public  service  coriwrations  50. 

Other  bonds,  stocks,  etc 95 . , 

Total  of  items  here  listed 2,375 

Total  Resources 3,338. 

'  This  table  is  constructed  on  the  basis  of  data  in  the  Report  of  the  Comp- 
trnller  for  iqii.  pp.  774-78. 


National 

Trust 

Aggre- 

Banks 

Companies    gate 

57-. 

•    377   ■    •      848 

■1.939- • 

...1,222.  .. 

i,720 

.2,966.. 

..    +60... 

4,538 

•     740.. 

3   ■■ 

748 

156.. 

■■     iSS ■•• 

376 

■    35I-- 

..    362... 

788 

.     148.. 

. .     168... 

366 

.     208.. 

..    769... 

1,072 

6,56s   . 

•   3.516.  .. 

12.456 

9,368.. 

.4.068 

'6,774 

CREDIT— BANK  ASSETS  AND   BANK   RESERVES 


507 


This  table  makes  clear  that  the  figures  for  real  estate 
loans  given  in  the  table  for  all  banks,  a  few  pages  preced- 
ing, were  much  too  high.  It  leaves  the  relations  among 
the  other  items,  however,  not  greatly  changed.  "All 
other  loans"  increase  from  slightly  less  than  23^0  of  total 
assets  to  27%.  If  we  concede  that  one-half  of  the  "all 
other  loans"  represents  liquid  "commercial  paper"— a  very 
liberal  estimate,  as  we  have  previously  concluded — we  get 
about  iS/^%  of  the  assets  of  these  institutions  in  the 
form  of  "commercial  paper,"  an  increase  over  the  iiK% 
to  be  assigned  on  the  basis  of  the  other  table.  The 
figure  is  the  roughest  sort  of  approximation.  I  attach 
little  importance  to  the  exact  percentage,  and  the  argument 
which  follows  is  not  dependent  on  any  exact  figure  here. 
The  proportion  of  collateral  loans  to  total  resources  is 
changed  also,  and  even  more:  collateral  loans  are  18%  of 
total  bank  resources  when  all  kinds  of  banks  are  included, 
and  are  over  22%  of  total  bank  resources  when  only  State 
and  national  banks  and  trust  companies  are  counted.  If 
the  foregoing  is  correct  within  very  wide  limits  of  error  as 
to  the  amount  of  commercial  paper,  collateral  loans  very 
substantially  exceed  commercial  paper.  If  all  the  "all 
other  loans"  should  be  counted  as  commercial  paper,  col- 
lateral loans  are  still  not  far  behind  them— 22%  as  against 

27>^%. 

What  is  the  significance  of  this?  We  have  seen  that  for 
national  banks,  the  great  bulk  (over  66%)  of  the  collateral 
loans  were  secured  by  stocks  and  bonds  in  June,  1915.  We 
saw  reasons  for  supposing  that  a  higher  percentage  of  stock 
exchange  collateral  would  be  found  when  State  banks  and 
trust  companies  are  included.  Suppose  we  assume  that  75% 
of  the  collateral  loans  of  all  three  classes  of  institutions  here 
in  question  are  based  on  stock  exchange  collateral.'    This 

'  A  single  observation  does  not  justify  very  confident  conclusions,  and 


5o8 


THE   VALUE   OF   MONEY 


III! 


; 


I' 


would  mean  16;^';^  of  the  total  resources  of  these  institu- 
tions in  stock  exchange  loans— still  well  above  the  i3J^% 
we  have  assigned  to  "commercial  paper."    In  any  case,  it  is 
at  least  justifiable  to  contend  that  loans  on  stock  exchange 
collateral  are  as  great  in  volume  as  commercial  loans.    I 
think  that  they  very  substantially  exceed  them.    But  fur- 
ther, we  have  another  large  percentage  of  bank  resources 
invested  in  stock  exchange  securities  outright— chiefly  in 
bonds.    The  aggregate  for  those  investments  in  the  institu- 
tions under  consideration  is  3,250  millions.    This  is  some- 
thing oyer  \(f^  of  the  total  assets  of  these  insUtutions. 
Combining  this  with  the  loans  on  stock  exchange  collateral, 
we  get  nearly  36^^  of  bank  and  trust  company  assets  in- 
vested, directly  or  indirectly,  in  stock  exchange  securities,  as 
against  an  assumed  13  K*;;  in  commercial  paper.    Conced- 
ing that  all  the  "all  other  loans"  are  commercial  loans,  the 
stock  exchange  assets  still  exceed  them  in  the  ratio  of  ^6 
to  27K. 

In  our  second  table,  we  have  listed  items  which  aggre- 
gate only  12,456  millions  of  the  total  resources  for  these  in- 
stitutions of  16,774  millions.  The  items  listed,  however, 
.  represent  virtually  all  the  credit  extended  by  banks  to  in- 
dustry, commerce,  agriculture,  the  stock  market,  other 
speculation,  and  the  State.  The  excluded  items  of  main 
importance  are:  Due  from  other  banks  and  bankers,  2,302 
millions;  checks  and  other  cash  items,  432  millions;  and 
cash  on  hand,  1,411  millions— the  three  items  aggregating 
4.146  millions,  which  virtually  clo.ses  the  gap.    These  three 

(wires  for  sul.se(,uenl  years  may  alter  this.  There  is  reason  for  su,,,H«inK 
hat  comm.Klity  collateral  was  unusually  lar^e  in  |.r..,K.rtion  in  the  Comi,- 
roller  s  l.Kures  for  national  hanks  in  June.  .,,.5.  ( , )  In-cause  the  banks  had 
l«en  trying  to  re<luce  stork  collateral  loans,  foII,>«inK  the  collapse  of  the 
outhreak  of  the  War,  {2)  (.ecause  they  were  aiding  cotton  owners  to  tide 
-vcr  a  [wricKl  of  stress,  and  (.0  because  of  great  grain  speculation.  Later- 
■  016  figures  show  lh,s.  Comptroller's  Rtpori,  I.  p.  30.  Stock  loans  increase 
from  66%  to  71..'%,  of  collateral  loans. 


CREDIT      BANK  ASSETS  AND   BANK   RESERVES 


509 


items  are  of  immense  importance  as  making  for  liquidity 
in  banking  assets,  and  as  making  possible  extensions  of 
credit  to  the  business  world,  but  it  is  not  proper  to  count 
them  when  an  estimate  of  the  extent  of  bank-credits  is  in 
question.  Our  second  table  contains,  for  the  three  classes 
of  institutions,  all  the  items  properly  counted  there,  except 
overdrafts  (small  in  amount)  and  one  other  big  item  which 
does  not  get  into  bank  statements  at  all,  namely,  v.'ercer- 
tifications  and  "morning  loans:'  Of  this  last  item,  more 
later.  We  may,  then,  recalculate  our  percentages  on  the 
basis  of  the  credit  extended  by  the  three  clasess  of  institu- 
tion"  instead  of  on  the  basis  of  total  resources.  On  this 
basl-,  the  percentages  are: 

Real  estate  loans,  7.4%; 

Collateral  loans,  jo^f ,  of  which  we  assign  to  stock  ex- 
change collateral,  22^%,  and  to  other  collateral, 
VA7o\ 

All  other  loans,  36.4^^^,  of  which  we  .sign  to  "Com- 
mercial paper"  18.2*,'^; 

Total  stocks  and  bonds,  26%. 

Adding  the  percentages  for  stock  exchange  collateral  loans 
and  for  stocks  and  bonds  owned,  we  get  48^^%  of  all  ex- 
tensions of  bank -credit  for  these  three  classes  of  institutions 
in  the  form  of  credits  extended  to  tht  security  market.  If 
everything  else  except  the  real  estai-  loans  should  be 
counted  as  "commercial  loans"  the  stock  exchange  credit 
would  still  exceed  the  commercial  credit.  If  my  estimate 
of  18.2%  of  bank-crcflit  based  on  commercial  paper  is  high 
enough,'  the  banks  and  trust  companies  have  extended  over 
two  and  a  half  times  as  much  credit,  at  a  given  time,  to  the 
security  market  as  they  have  to  commerce.  This  on  the 
face  of  the  record.  But  there  is,  as  above  indicated,  a 
'  The  preceding  arRument  would  indicate  that  it  is  much  too  high. 


In 


m 

hi  : 

r 


Ph 


111, 


II 


H 


Sio 


THE  VALUE  OF  MONEY 


further  item  which  does  not  get  into  the  record,  namely, 
overcertifications  and  "morning  loans."  Every  day  in  the 
great  speculative  centres,  and  very  especially  in  Wall  Street, 
enormous  advances  are  made  to  brokers,  which  are  canceled 
during  the  day.  but  which,  during  their  short  life,  are  a  real 
addition  to  bank-credit.  To  attempt  to  estimate  this  with 
any  accuracy  is  hopeless,  but  the  total  on  any  ordinary  day 
is  enormous,  and  most  of  it  *  extended  in  connection  with 
stock  market  transactions. 

A  final  comparison. *  which  will  conclude  this  perhaps  too 
wearisome  analysis  of  these  figures,  will  consider  the  loans 
alone,  neglecting  the  securities  owned: 

Of  total  loans: 

Real  estate  loans,  9.3%; 

Collateral  loans,  40.8%,  of  which  we  assign  to  stock 
exchange  collateral,  30.6*;^.  anrl  to  other  collateral. 

All  other  loans,  49.6%,  of  which  we  assign  to  "Com- 
me'-dal  paper,"  24.8%. 

The  development  of  bank  loans  on  stock  exchange  col- 
lateral is  a  remarkable  feature  of  the  three  or  four  decades 
preceding  1909.  The  following  figures,  of  national  bank 
loans  in  New  York  City,^  illustrate  the  tendency: 

'  The  figures  for  1909  are  fairly  typical  of  the  proportions  of  these  items 
in  the  assets  of  the  three  classes  of  institutions  for  the  ten  years  from  190+ 
to  1914.  Since  igoq,  there  has  been  some  increase  in  the  F>ercentaKcs  of 
real  estate  loans  and  "all  other  loans,"  at  the  exjK-nse  of  the  percentasi-  of 
securities  owned,  and  collateral  loans,  as  these  years  have  been  years  of 
reduced  activity  on  the  Stock  FCxchanRe.  The  changes  are  not  imjiortant 
enough,  however,  to  modify  any  conclusions  which  we  shall  base  on  the 
figures  here  given.  All  classes  of  loans  have  grown,  and  investments  in 
securities  nave  grown,  but  real  estate  loans  and  "all  other  loans,"  particu- 
larly the  latter,  have  gniwn  somewhat  more  rapidly. 

»  These  figures  are  Uken  from  Conant,  Principles  0/  Money  and  Banking, 
vol.  II,  p.  52. 


CREDIT— BANK  ASSETS  AND  BANK  RESERVES         51I 


Date 

1886. 
i8go. 

l8<)2. 

1894. 
i8g6. 
i8q8. 
iqoo. 
1902. 

1903  • 
1904 


(000,000  omitted) 

Loans  on 
Commercial  Paper  ' 

146 

151 

160 

168 

151 

181 

i8s 

210 

23Q 

268 


Advances  on 
Securities 

107 

14S 

183 

192 

162 

260 

384 

396 

391 

538 


The  tendency  is  not  peculiar  to  America,  however.  The 
following  table  gives  a  classification  of  the  loans  and  dis- 
counts of  all  the  great  European  banks  *  in  selected  years 
from  1875  to  1903: 


Date 

187s. 
1880. 
1885. 
1890. 
1895. 
1899. 
1900. 
1902. 
1903. 


(Figures  in  francs,  000,000  omitted) 

Note  Commercial  Advances  on 

Circulation  Loans  Securities 

9.699 4.027 828 


10482 3384- 

11,662 4,050. 

•13,194 5.192- 

15.896 5.328. 

•14.992 8,352. 

•  IS.906 8,514. 

•16,215 6,939. 

16,539 


.1,113 
I.23I 

1,549 
3,669 
4,037 
4,171 
.4,178 


6,147 4,129 


We  conclude,  therefore,  that  the  great  bulk  of  banking 
credit  in  the  United  States,  even  of  "commercial  banks," 
is  not  commercial  credit.    Much  of  it,  in  the  smaller  places, 

'  The  term  "commercial  paper,"  as  here  used  by  Conant  (whose  source 
is  the  ComptroUif's  Report  for  1904  and  preceding  years),  doubtless  includes 
a  good  many  items  which  we  have  decided  not  to  count  as  commercial  pa- 
per. The  item,  "advances  on  securities,"  also  includes  some  items  other 
than  stock  exchange  loans,  but  not  a  high  percentage  in  New  York  City. 
In  1913  the  figures  for  all  reporting  hanks  in  New  York  City  were;  cnllateral 
lo;  ns,  1,070;  "other  loans,"  658.    Report  of  Comptroller,  1913,  p.  779. 

'  Taken  by  Conant  {Ibid.,  p.  51)  from  the  Bconomiste  Europien  (April  29, 
1904),  XXV,  p.  546. 


5^- 


THE   VALUE   OK   MONEY 


r^ 


m'l 


III 


ii 


II 
n 


1  ' 


i 


especially,  represents  in  fact,  whatever  the  form,  long  time 
advances  to  agriculture  ami  industry.  Most  of  it,  in  the 
great  cities,  and  to  a  large  extent  in  even  the  smaller  places, 
represents  advances  to  the  permanent  financing  of  corporate 
industry.  Excluding  real  estate  loans,  more  than  half  of 
bank-credit  represents  either  ownership  of  bonds  (with 
some  stocks)  or  else  advances  on  stocks  and  bonds.  An- 
other important  i;art  of  bank-credit,  which  I  shall  not  even 
attempt  to  measure,  is  employed  in  financing  commodity 
speculation. 

It  is  worth  while  to  compare  our  figures  concerning  bank 
loans  with  Kinley's  figures,  which  we  have  previously  con- 
sidered, for  deposits  made  on  March  i6  of  1909.  the  year 
we  have  chosen  for  the  bank  loans  figures.  It  is  important 
to  remember  that  "deposits,"  as  used  by  Kinlcy  in  this  in- 
vestigation, does  not  mean  what  the  term  means  in  a  bank 
balance  sheet.  Kinley's  figures  relate  to  the  actual  items 
deposited  on  the  day  in  question,  and  not  to  the  net  balance 
after  deposits  and  withdrawals  have  been  compared  when 
the  bank  has  closed  for  the  day.  A  large  deposit  in  the 
balance  sheet  sense  might  show  no  "deposits"  in  Kinley's 
sense,  in  a  given  day;  while  enormous  "deposits"  in  Kin- 
ley's sense  might  be  so  offset  by  incoming  checks  that  vir- 
tually nothing  is  left  on  the  balance  sheet  at  the  end  of  the 
day,  for  a  given  depositor.  Kinley's  figures  thus  give  us  a 
means  of  getting  at  the  degree  of  activity  of  different  classes 
of  deposits  in  the  balance  sheet  sense,  and  so.  indirectly,  of 
different  classes  of  loans. 

Loans  and  deposits  (in  the  balance  sheet  sense)  are,  as  we 
know,  closely  correlated.  This  is  true  for  banks  in  the 
aggregate,  and  for  banks  individually  at  a  moment  of  time. 
It  is  not  generally  true  of  a  given  individual  deposit  ac- 
count at  a  moment  of  time,  but  through  a  period  of  time, 
for  business  deposits,  it  tends  to  be  true  that  the  items  de- 


CKKDIT      BANK   ASSETS   AND   BANK    RESERVES 


5'3 


i 


posited  offset  the  amounts  borrowed.'  If  the  items  de- 
posited are  numerous,  if  the  depositor  has  an  "active"  de- 
posit account,  receiving  a  large  flow  of  banking  funds,  as 
compared  with  his  net  deposit  balances,  we  may  infer  that 
his  loans  are  also  active,  that  he  pays  off  loans  frequently, 
that  his  paper,  in  the  assets  of  the  bank,  is  "liquid." 

I  need  not  give  the  details  of  Kinley's  figures  again,  as 
they  have  been  elaborately  analyzed  in  connection  with 
the  estimate  of  the  "volume  of  trade."  r  The  figures  show 
that  retail  and  wholesale  deposits  between  them  make  up 
about  25*^,'  of  the  total  deposits.  This  would  serve  to 
show  that  "commercial  paper."  which  we  have  allowed  to 
be  about  24.8  of  total  loans,  is  slightly  more  active  (and 
hence  "liquid")  than  the  average  of  loans.'  It  will  also 
suggest,  however,  that  our  figure  for  "commercial  paper," 
truly  liquid,  is  too  high,  since  we  should  expect  this  kind  of 
paper  to  be  more  active  than  the  average — unless,  indeed, 
stock  exchange  collateral  loans  are  so  exceedingly  active  as 
to  make  a  tremendously  high  average.  I  refrain  from  try- 
ing to  get  a  definite  answer  on  this  point,  since  there  are 
many  indeterminate  elements:  among  others,  uncertainty 
as  to  the  extent  to  which  wholesale  deposits  and  retail  de- 
posits include  all  commercial  deposits,  and  uncertainty  as 

'  For  the  depositor  who  borrows  from  several  b.inks,  but  deposits  only 
in  one, — as  a  stockbroker — the  items  (iejOTsitcti  will,  of  course,  substantially 
exceed  the  amounts  borrowed  at  the  bank  where  the  de[)osits  are  made. 
But  this  will  not  afTect  our  argument  for  classrs  of  de|x>sitors  from  repracH- 
lalive  banks  in  the  community  as  a  whole. 

-Supra,  chapters  on  "Volume  of  Money  and  Volume  of  Trade,"  and 
"Statistical  Demonstrations  of  the  Quantity  Theorj-." 

'  The  rele\-ance  of  comparinR  w  holesalc  and  retail  fiRures  with  figures 
for  "commercial  pajier"  may  well  l)e  questioned,  since  our  conception  of 
commercial  liquid  loans  would  include  manufacturers'  |)aper  which  repre- 
sents raw  materials,  work  in  prcKess,  and  bills  receivable.  However,  we 
have  found  reason  to  conilude  that  Kinley's  whf)!cs;i!e  deposits  include  a 
large  percentage  of  manufacturers'  de|x>sits.  (Supra,  p.  245.)  The  com- 
parison here  is  in  any  case  rough.  We  do  not  neetl  precise  figures  for  the 
argument. 


■J' I 


SI4 


THE  VALUE  OF  MONEY 


I! 


i  I 
11 


h^ 


to  the  extent  to  which  they  exclude  manufacturer's  deposits. 
The  great  built  of  Kinley's  deposits,  however,  fall  into  the 
"all  other"  class,  and  the  great  bulk  of  the  "all  other  de- 
posits" are  located  in  the  great  financial  and  speculative 
centres,  particularly  New  York.  We  have  concluded  that 
they  represent  chiefly  (a)  transactions  in  securities;  (b) 
other  speculation;  (c)  loan  and  other  financial  transactions, 
particularly  the  shifting  of  call  loans  on  stock  exchange 
collateral.  It  is,  then,  the  deposits  of  those  connected  with 
the  great  financial  and  speculative  markets,  particularly 
the  stock  market,  whose  deposits  are  most  active,  and  whose 
loans  are  most  liquid.  Stock  market  collateral  loans  thus 
constitute  the  most  perfectly  satisfactory  sort  of  bank  loan, 
from  the  standpoint  of  liquidity.  Though  such  loans  do 
not  make  up  the  bulk  of  bank  loans  (we  have  concluded 
that  they  constitute  30.6%  of  the  loans  of  State  and  na- 
tional banks  an  J  trust  companies  in  iqoq),  they  do  account 
for  the  bulk  of  banking  activity,  and  supply  the  greatest 
part  of  the  liquidity  of  total  bank  loans. 

When  we  consider  further  the  item  of  securities  (chiefly 
bonds)  in  banking  assets,  we  find  another  highly  important 
source  of  liquidity.  The  sales  of  bonds  in  the  great  bank- 
ing centres  are  enormous.  The  figures  of  bond  sales  on  the 
exchanges  do  not  begin  to  tell  the  story.  One  big  bank  in 
New  York  in  191 1  sold  more  than  half  as  many  bonds  as 
were  sold  in  that  year  on  the  floor  of  the  Stock  Exchange.' 
It  has  been  frequently  stated  that  ten  bonds,  of  those  listel 
on  the  Exchange  are  soW  over  the  counter  for  one  on  the 
floor.  This  is  truer  of  Boston  than  New  York.  The  "out- 
side market"  for  unlisted  bonds  is  a  very  important  mat- 
ter. Dealin„-  among  banks  in  these  items  and  in  foreign 
exchange  are  exceedingly  important.  This  is  especially  true 
of  the  business  of  the  great  private  bankers,  as  Morgan, 

'  Pratt,  Work  of  ]Vall  Street,  1912  cd.,  p.  264. 


CREDIT— BANK  ASSETS  AND  BANK  RESERVES         515 

Kuhn-Loeb  and  others.  Much  of  this  does  not  appear  in 
Kinley's  figures,  since  neither  the  deposits  of  the  great 
private  banks  in  other  banks,  nor  the  deposits  made  in  the 
private  banks  themselves  (so  far  as  New  York  City  is  con- 
cerned) figure  in  his  totals.'    Had  they  been  included,  the 

'  Returns  from  private  banks  in  Kinley's  investigation  of  igog  are  vir- 
tually negligible,  so  far  as  absolute  amounts  are  concerned,  for  the  whole 
country.  For  New  York  City,  they  are  absolutely  negligible.  The  "all 
other  deposits"  reiwrted  by  private  banks  in  New  York  City  for  March  16, 
1909.  are  one  thousand,  nine  hundred  and  eighty-four  dollars,  in  all!  The 
grand  total,  "all  other  deposits"  for  all  classes  of  banks  reporting  in  New 
York,  is  over  a  hundred  and  ninety-eight  millions.  The  great  private  banks 
are,  thus,  clearly  not  represented.  They  are  not  represented  in  any  form, 
smce  Kinley's  figures  exclude  deposits  made  by  such  banks  in  other  banks. 
How  important  they  would  be,  if  included,  one  cannot  be  sure,  since  they 
keep  their  affairs  pretty  secret.  Some  information,  however,  is  available 
Thus,  the  Pujo  Committee  reports  {Report,  Feb.  28,  19 13,  p.  145)  that  on 
Nov.  I,  191  i,  there  was  $114,000,000  on  deposit  with  J.  P.  Morgan  and 
LomiKiny,  exclusive  of  $49,000,000  on  deposit  with  their  Philadelphia 
branch  of  Drexcl  and  Co.  It  is  understood  to  be  the  practice  of  J.  P.  Morgan 
and  Co.  to  keep  no  cash  on  hand,  and  to  de|XJsit  with  other  banks  all  their 
cash  and  checks.  On  this  date,  they  had  on  dei)osit  with  other  banks 
$12,094,000,  "which  presumably  included  all  their  own  funds."  It  may 
be  assumed,  therefore,  that  the  remaining  102  millions  was  loaned  out. 
There  can  be  no  doubt  at  all,  I  suppose,  that  practically  all  they  had 
lent  out  was  on  stock  and  bond  collateral.  They  are  known  to  be  one  of 
the  biggest  lenders  at  the  "money  post"  on  the  Stock  Exchange.  They 
are  not  supposed  to  do  much  business  with  ordinary  merchants  in  the  usual 
discount  and  deposit  way. 

I  have  found  no  figures  for  Kuhn-Loeb  &  Co.,  for  toUl  defxjsits  made 
with  them,  nor  for  their  dejwsits  in  other  banks.  The  Pujo  Committee 
{Ibid.,  p.  73)  states  that  for  the  six  years  preceding  19 13  this  firm  held, 
on  the  average,  deposits  from  interstate  corporations  amounting  to  over 
17  millions.  For  J.  P.  Morgan  &  Co.,  this  class  of  deposits  amounted  to 
about  half  of  toUl  deposits.  {Ibid.,  p.  57.)  There  is,  of  course,  no  assur- 
ance that  this  pniportion  holds  with  Kuhn-Loeb's  deposits. 

These  figures  are  very  great,  however.  For  the  week  ending  April  3, 
191S,  for  example,  only  three  banks  (the  National  City  Bank,  the  National 
Bank  of  Commerce,  and  the  Chase  National  Bank),  and  only  two  trust 
comfxinies  (the  Bankers  Trust  Company  and  the  Guarantee  Trust  Com- 
pany), held  de|X)sits  exceeding  those  credited  to  J.  P.  Morgan  and  Co., 
and  only  one  of  these,  the  National  City  Bank,  very  markedly  exceeded 
the  Morgan  deposits.  The  majority  of  the  New  York  Clearing  House  banks 
had  less  than  the  deposits  of  interstate  corporations  with  Kuhn-Loeb. 

As  all  the  big  private  bankers  deal  chiefly  in  stock  exchange  loans  and 
securities,  and  foreign  exchange,  and  as  this  kind  of  business  has  been  shown 


>ir) 


THK   VAI.l'K   OF   MOXrV 


l*^ 


r  ill 


I! 

i 


if 
I*' 


percentage  of  the  "all  other  diposits"  would  have  prown, 
and  we  should  have  had  still  more  inijjressive  cvidtnci-  of 
the  fact  that  nKnlirn  banking  in  the  United  States  is  largely 
bound  up  with  the  security  market,  and  that  nuMlcrn  bank- 
credit  gets  its  lifjuidity  chiefly  from  that  source. 

The  stor>-  is  even  more  im,,ressively  told  by  the  figures 
for  bank  clearings,  which  include  the  transactions  between 
banks,  and  the  transactions  of  the  private  bankers.  In 
New  York,  in  igoc;,  total  clearings  for  the  year  were  104 
billions,  as  against  62  billions  for  the  whole  country  outsido 
Xew  York.'  That  bank  clearings  are  closely  correlated 
with  stock  exchange  transactions,  has  been  demonstrated 
fully  by  X.  J.  Silberling,  who  has  shown  the  following  cor- 
relations: New  York  Stock  Exchange  share  sales  with  Aew 
York  clearings,  r  =.718;  total  clearings  for  the  country  v.th 
New  York  share  sales,  r  =.607;  total  clearings  for  the 
country  with  railway  gross  receipts  (as  representative  of 
ordinary  trade),  r  =.356.'  The  active  deposits  and  the 
liquid  loans  are  chiefly  connected  with  activities  in  finance 
and  speculation. 

Now  two  imijortant  practical  conclusions  are  suggested 
by  this  analysis.  The  first  is  that  the  complaint  of  many 
farmers,  merchants,  politicians,  and  even  scientific  writers 

ti>  be  exceedinsly  aitive  and  to  tall  for  larw  checks  and  clearings,  we  may 
assume  that  Kinleys  figures  would  l)e  greatly  ini  reaseil  if  they  were  included. 

The  trust  company  re|H>rts  for  Xew  York  in  Kinley's  li)?ures  are  also 
very  incomplete.  New  Nork  trust  companies  reix)rt  less  than  twice  as 
much  as  Boston  trust  companies,  and  an  aljsurdly  small  amount  as  com- 
pared with  banks.  (/..  .supra,  the  chapter  on  ".Statistical  Demonstrations 
of  the  Quantity  ThtH)ry." 

'  It  ha.s  lieen  supijosed  by  many  writers  that  Xew  York  ckarings  ex- 
a«Kerate  Xew  York  transiictions  as  compared  with  the  extent  to  which  out- 
side dearinjjs  represent  transactions.  Such  evidence  as  we  have  would  show 
that  this  is  not  true  to  a  suHicient  decree  to  mcxlify  the  present  argument. 
Clearinijs  are  less  than  de|K)sits  in  lK)th  .\ew  York  and  the  country  outside. 
S:if>rj.  chapter  on  "Statistical  Dcmonstr.ilii.ns  of  (.)uanlily  Theory." 

»••  The  .Mystery  of  Clearinns."  Annalist,  .\uj;.  14,  iqK,',  p.  198.  Supra, 
chapter  on  "  Volume  of  .Money  and  Volume  of  Tra.lf." 


CREDIT      BANK  ASSETS  AND  BANK  RESERVES         517 

that  too  much  money  and  bank-cre<lit  arc  at  the  disposal 
of  Wall  Street  and  other  spccolators  rests  on  a  misunder- 
standing of  causal  relations.     Wall  Street  does  not.  by 
using  a  large  amount  of  bank-credit,  take  just  that  much 
away  from  ordinary  business.     Rather,  it  increases  the 
amount  available  for  ordinary  business!    Wall  Street,  and 
the  other   financial  and  speculative  centres,   supply  the 
liquidity  for  bank  assets,  and  so  make  possible  loans  on 
non-liquid  paper.    Banks  do  not  need  to  have  all  their 
assets  liquid.    If  they  did,  American  banks  would  have 
long  since  gone  umier!    The  foregoing  discussion  of  loans 
to  farmers,  and  manufacturers  and  even  merchants  should 
have  made  that  clear.     But  banks  do  need  a  substantial 
margin  of  liquidity,  to  protect  the  rest.    They  get  it  from 
stock  exchange  collateral  loans,  and  from  ownership  of 
listed  and  easily  marketable  bonds,  primarily.    They  get 
part  of  it  from  true  commercial  paper.    Thus,  the  director 
of  a  countr>'  bank  in  Iowa  told  the  writer  that  banks  in  his 
section— where  banks  owned  in  large  measure  by  farmers, 
and  dealing  largely  with  farmers,  are  very  numerous  and 
important— mat  e  a  regular  practice  of  buying,  through 
brokers,  a  considerable  amount  of  notes  of  outside  mer- 
chants.   They  do  this  to  protect  themselves.    Their  other 
loans,  to  farioers,  while  good,  are  slow.     If  pressed  them- 
selves, they  cannot  press  their  depositors.    These  notes 
bought  through  note-brokers,   however,   are  imi)ersonal. 
They  can  refuse  to  renew  them.    They  can  sell  them  again. 
They  thus  buttress  the  rest  of  their  assets.    They  can  thus 
lend  more,  rather  than  less,  to  local  customers.    The;   can 
safely  get  along  with  much  smaller  cash  reserv;  s.    Simi- 
larly with  the  practice  of  country  banks  of  sendaag  a  large 
part  of  their  cash  to  Wall  Street  banks  to  be  lent  on  call. 
for   which    tiie  country  banks   get.   say.    ->*",'    from    ihc 
Wall  Street  banks.    Their  country  customers  would  pay 


iR 


518 


THE    VALUK   OP  MOI^Y 


iMii 


6%  or  more  for  that  money  in  some  cases,  but  the  banks 
dare  not  tic  up  more  of  their  assets  in  non-Uquid  local 
paper.  They  lend  more,  rather  than  less,  at  home,  because 
they  send  part  away.  Wall  Street  is  not  "dnimng  our 
Cfjmmerce  of  its  life  blood"!  •  Wall  Street  is  rather  pre- 
venting that  life  blo«Mi  from  coagulating! 

A  st'cond  imiKirtant  practical  conclusion  relates  to  the 
provision  in  the  Federal  Reserve  Act  which  forbids  Federal 
Reserve  Banks  to  rediscount  stock  exchange  paper.    This 
provision  was  intended  to  keep  funds  from  being  diverted 
from  commerce  to  stock  speculation,  and  doubtlt^  met  the 
approval  of  man\-  verj'  good  students  of  the  subject.    If 
the  foregoing  be  true,  however,  that  provision  is  a  mistake. 
It  is  a  mistake,  first,  because  it  will  lessen,  rather  than  in- 
crease, the  power  of  th^i  Reserve  Banks  to  provide  relief 
to  commerce  through  aiding  in  making  bank  assets  liquid 
vta  the  stock  market.    It  will  limit  the  Uquid  assets  of  the 
Federal  Reserve  Banks  in  too  great  a  degree  to  gold.    It  is  a 
mistake,  in  the  second  place,  because  it  prevents  the  Re- 
serve Banks,  particularly  in  New  York  and  Boston,  from 
making  satisfactory-  profits— which  is  one  important  pur- 
pose of  a  bank!    Even  more  important,  however,  is  the 
third  objection:  it  prevents,  in  large  degree,  the  Federal 
Reserve  Banks  from  being  efTective  weapons  against  the 
"Money  Trust."    How  far  we  have  a  "Money  Trust" 
need  not  be  here  argued.    The  Pujo  Committee,  relying 
m  considerable  degree  on  admissions  of  prominent  finan- 
ciers that  "concentration  had  gone  far  enough,"  and  on  the 
inability  of  Mr.  Baker  to  find  more  than  one  issue  of  se- 
curities of  over  $10,000,000  within  ten  years,  without  the 
cooperation  or  participation  of  one  of  the  members  of  a 
small  group,  concluded  that  we  have  a  "Money  Trust"  in 
the  sense  that  there  k  "an  esiabiished  and  weil-defined 

'   See  any  Congressional  debate  on  "the  Money  Trust." 


CREDIT  -BANK  ASSETS  AND  BANK   RESERVES 


519 


identity  and  community  of  interests  between  a  few  leaders 
of  finance  .  .  .  which  has  resulted  in  a  vast  and  growing 
concentration  of  control  of  money  and  credit  in  the  hands  of 
a  comparatively  few  men."  '  How  far  this  conclusion  is 
justified  is,  of  course,  a  matter  that  would  require  elaborate 
discussion.  There  seems  to  be  evidence  that  there  is. 
since  the  death  of  the  elder  Morgan,  a  decided  loosening  of 
ties.  One  feels  the  need,  moreover,  of  discounting  very 
considerably  many  of  the  conclu.sions  of  the  Pujo  Com- 
mittee. The  present  writer  feels  that  the  case  has  been 
made,  however,  that  there  has  been,  and  probably  con- 
tinues, a  much  greater  concentration  of  such  control  than 
is  desirable.  Whether  or  not  there  is  at  present  such  a 
"  Money  Trust."  it  seems  pretty  clear  that  temporary,  if  not 
permanent,  alignments,  may  give  eflective  monopoly  con- 
trol when  the  issue  of  very  big  blocks  of  securities  is  in- 
volved. For  present  purposes,  however,  it  is  enough  to 
note  that  if  there  is,  or  should  come  to  be,  a  "Money 
Trust,"  it  is  a  trust  concerned  with  financing  industry, 
through  handling  security  issues,  and  not  a  trust  in  the  grant- 
ing of  ordinary  commercial  credit.^  If,  therefore,  the  Fed- 
eral Reserve  Banks  are  to  compete  with  it,  and  break  its 
monopoly,  they  must  do  it  by  entering  the  market  with 
funds  for  the  financing  of  corporate  industry.  Power  to 
rediscount  commercial  paper  seems  a  feeble  and  hardly 
relevant  weapon  against  a  combination  concerned  with 
purchasing  securities,  and  making  collateral  loans!  No 
doubt,  this  power  is  worth  something.  If  an  independent 
investment  banker  wishes  to  compete  with  a  "Money 
Trust"  in  financing  a  new  enterprise,  he  can  go  to  his  com- 

'  Pujo  Committee  Report,  Feb.  28,  1913.  P-  130-  <-'/■  >''«'  P-  '38  (sUte- 
ments  cA  Messrs.  Baker.  Revnolds.  Schiff.  and  Perkins),  iind  p.  160  for 
statements  regarding  the  testimony  of  Messrs.  Morgan  and  Baker. 

'  I  know  no  responsible  writer  who  has  charged  that  there  is  a  monopoly, 
or  a  tendency  toward  monop<)l>-,  in  this  matter. 


S20 


THE  VALUE  OF  MONEY 


I'l 


:     8' 

Ih' 


•Ml 


3: 


liffti 

Ik ; 


mercial  banker,  and  offer  collateral  security  for  a  loan;  if 
the  commercial  banker  wishes  to  aid  him.  but  h     lort  of 
lending  power,  he  may,  if  he  has  plenty  of  co       -rcial 
paper  available  for  rediscount,  rediscount  it  with     .,  Fed- 
eral Reserve  Bank,  and  so  get  the  additional  funds.    But 
a  New  York  bank,  or  trust  company,  with  the  bulk  of  its 
assets  in  stock  exchange  investments,  may  well  not  have 
enough  commercial  paper  eligible  for  rediscount,  and  the 
Federal  Reserve  Bank  could  help  very  much  more  effec- 
tively if  it  could  take  collateral  loans  directly.    A  fourth, 
and  even  more  important  objection  to  the  restriction  on 
stock  exchange  collateral  loans  for  Federal  Reserve  Banks 
relates  to  the  power  of  these  banks  to  aid  in  a  crisis.    Crises 
first  hit  the  stock  market.    Financial  panics  are  most 
acute  there.    The  need  for  immediate  and  drastic  relief 
is  greatest   there.     If   stock   exchange   loans   lose    their 
liquidity,   what  of  the  rest  of  bank   loans?    Power  to 
lend  on  stock  exchange  collateral,  in  the  hands  of  the 
Federal  Reserve   Banks,  may  well  prove,  in  crises,  an 
essential,  if  we  wish  to  make  our  system  definitely  "panic 
proof."  » 

And  now  for  a  vital  theoretical  conclusion  from  this 
lengthy  analysis  of  bank  loans.  For  the  quantity  theory, 
and  the  "equation  of  exchange,"  all  exchanges  stand  on  a 
par.  If  one  exchange  takes  place,  that  lessens  the  money 
and  credit  available  for  another  exchange.  The  more  ex- 
changes there  are.  the  less  money  and  credit  there  arc  per 
exchange,  and  the  lower  prices  must  l)e,  as  a  consequence. 
Nothing  could  be  more  false.    Exchanges  are  not  on  a 

'  I  am  not  naive  .muiK'h  to  supfjose  that  this  suKni-sti.m  tan  be  much 
more  than  an  illustration  ..f  the  liearinK  of  my  theory!  [  should  even  aKree 
that  the  ix.liiu  al  dlirK  ullies  are  so  Rreat  that  we  wouUI  do  well  to  try  out 
our  system  in  limes  of  stress  k-fore  seriously  raising  the  <)uestion  of  RivinR 
the  Iwleral  Keser.e  Hanks  the  power  to  rediscount  loans  on  stock  excbanitc 
collateral. 


CREDIT-  BANK  ASSETS  AND  BANK   RESERVES         52 1 

par.*  Some  classes  of  exchanges  increase,  rather  than  de- 
crease the  funds  available  for  handling  others.  The  ac- 
tivity of  the  speculative  markets,  making  loans  fluid, 
enormously  increases  the  lending  power  of  the  banks  for  all 
purposes.  Exchanges  of  securities,  especially,  instead  of 
lowering  prices,  make  it  easier  for  prices  to  rise.'    The 

'  Walker's  version  of  the  quantity  thtt)ry,  exiiudinK  credit  transactions, 
escapes  much  of  this  criticism.   Supra,  chapter  on  "  Kquation  of  KxchanRe." 

'  It  is  nothinx  for  Wall  Street  to  "turn  over"  many  times  two  billion 
dollars  worth  of  securities.  In  a  bi^  bull  year,  this  will  be  accomplished 
twelve  or  more  time-,  without  effort  —prices  risinR  merrily,  so  long  as  no  new 
supply  of  stocks  and  bonds  comes  in  to  make  trouble.  (See  our  estimate 
of  New  York  security  transactions,  supra,  chapter  on  "\'olume  of  Money 
and  Volume  of  Trade.")  But  let  there  be  a  li({uidation  by  investors  of  any- 
thing like  two  billions,  sold  once,  and  the  market  fee's  a  tremendous  drag. 
It  seems  universally  agreed  that  foreign  selling  of  securities  during  the 
present  War  has  l>een  a  great  factor  in  checking  advances  in  security  prices 
in  New  York.  The  actual  amount  of  liquidating  by  foreign  investors,  how- 
ever, has  l)een  trifiir  as  com|Kired  with  the  volume  '^f  sales  since  the  War 
began.  The  best  estimate  of  foreign  liquidation  is  probably  that  of  the 
National  City  Bank,  which  has  taken  careful  account  of  previous  estimates, 
and  which  has  unrivaled  sources  of  "inside  information."  The  estimate 
of  this  institution  is  that  from  a  billion  and  a  half  to  a  billion  six  hundretl 
million  dollars  worth  of  foreign  held  securities  have  been  liquidated  in 
America  since  the  beginning  of  the  War.  (This  does  not  include  foreign 
l«)ans  placed  here.)  This  estimate  is  given  in  October  of  1916.  (Monthly 
circular  of  the  National  City  Bank  on  "  Kconomic  Conditions,  etc.,"  Oct., 
igi6,  p.  3.)  It  is  safe  to  say  that  no  amount  of  "churning"  of  securities 
already  in  the  market  could  have  anything  like  the  depressing  efTect  on 
security  prices  that  an  unusual  amount  of  li<iuidation  by  investors  has. 
It  is  not  increase  in  number  of  exchanges  that  depresses  prices.  It  is  increase 
in  the  floating  supply.  Activity  in  the  floating  supply  makes  it  easier, 
rather  than  hanler,  for  speculators  to  get  banking  accommodations  which 
enable  them  to  "hold"  and  "carry"  securities,  and  activity  in  sales  there- 
fore positively  tends  to  increase  rather  than  to  decrease,  security  prices. 
The  broadening  of  the  range  of  securities  dealt  in,  moreover,  instead  of 
depressing  the  prices  of  those  already  ac'ive,  heljis  to  sustain  them.  Thus, 
brokers  and  bankers  welcomed  the  recent  revival  of  activity  in  the  rails, 
following  the  bull  market  in  war  stocks.  It  gave  a  broader  basis  for  loans. 
Banks  would  lend  more  liljerally,  and  on  narrower  margins,  if  railroad 
stocks  could  be  mixed  with  the  brokers'  war  stock  collateral. 

Here  again  we  see  the  significance  of  the  distinction  b  tween  long-time 
interest  rates,  connected  with  the  volume  of  real  capital,  and  the  "money- 
rates." 

Again,  |X!ri<xlic  payments  of  interest  and  dividends,  temporarily  locking 
up  considerable  sums  of  l)ank  de[>osits  which  have  to  be  built  up  in  antici- 


533 


THE   VALUE   OF  MONEY 


I 


years  of  extraordinary  stock  sales  have  always  been  "bull" 
years.  There  have  been  big  "bear"  days,'  but  never  big 
bear  years,  in  the  record  of  New  York  Stock  Exchange 
share  sales.  The  selling  and  reselling  of  speculative  goods 
of  securities,  and  of  notes  and  bills  are  especially  important 
as  making  it  easier  for  banks  to  expand  loans.  To  list  all 
manner  of  items,  as  Professor  Fisher  does,''  "real  estate, 
commodities,  stocks,  bonds,  mortgages,  private  notes,  time 
bills  of  exchange,  rented  real  estate,  rented  commodities, 
hired  workers,"  and  count  them  all  as  "actual  sales,"  all 
part  of  the  "goods"'  which  make  up  the  "volume  of 
trade,"  is  to  put  the  theory  utterly  beyond  the  pale.  Sea- 
sonal calls  on  an  inelastic  money  supply  for  actual  cash  to 
move  crops  and  pay  agricultural  wages  may  make  a  real 
difference  in  the  value  of  money;  scarcity  of  money  of  the 
right  denominations  for  retail  trade  may  give  an  agio  to 
such  money,*  but  the  money  and  credit  used  by  specula- 

pation  of  such  i^yments,  have  a  very  much  m(jre  serious  effect  on  the  money 
market  than  <lo  payments  many  times  greater  in  connection  with  stock 
sales.  The  tension  in  the  lx)n(l(in  money  market  growinK  t)ut  of  periodic 
accumulations  and  disbursements  of  the  British  Government  is  well  known. 
The  summer  of  iqio  witnessed  a  ttm|)orary  tiRhtening  in  Wall  Street  (in 
what  was,  generally,  the  period  of  easiest  money  the  Street  has  ever  known), 
from  a  similar  cause— a  hundiing  of  dividend  and  interest  fwyments,  with 
some  other  larse  financial  transattions.  Money  rates  in  New  York  regu- 
ularly  show  the  inlluence  of  such  payments,  temporarily.  Money  rates 
also  show  the  inlluence  of  active  spet  ulaUon,  as  a  rule,  as  shown  by  Mr 
Silberimg's  investiK=ilion»  ("The  .Mystery  of  Clearings,"  Annalist,  Aug.  14, 
iQi'j),  but  it  takes  a  vir>-  much  greater  volume  of  stock  sales  than  of  divi- 
dend and  interest  payments  to  produce  a  v\\en  effect  on  money  rates. 

'  As  May  g,  igoi,  when  ,?,336,6gs  shares  were  sold.  Compare  Mitchell's 
stock  Ijarometer,  1890-igii,  Business  Cycles,  p.  175,  with  records  of  share 
jjiles  for  t.Sose  years. 

« Purchasing  Power  of  Money,  IQ13  ed.,  p.  186.  The  same  criticism  ap- 
plie^  to  Kemmerer,  and  Jevons.  (/.  Kemmerer,  Money  and  Crtiit  Instru- 
ments,  pp.  70-71.    It  is  applicable  to  most  quantity  theorists. 

*  Ibid.,  p.  185.  It  will  be  noted  that  at  this  point,  Fisher  lapses  trom  the 
doctrine  that  volume  of  tn\de  is  determined  by  "physical  capacities  and 
techni(|Uf."    Ibid.,  p.  155. 

«C/.  our  discussion,  supra,  in  the  chapter  on  the  "Functions  of  Money  " 
of  money  in  retail  trade.  ' 


■■!■ 


CREDIT— BANK  ASSETS  AND   BANK   RESERVES 


523 


tors,  bill  brokers,  dealers  in  foreign  exchange,  investment 
bankers,  etc.,  increases,  rather  than  decreases,  the  funds 
available  for  ordinary  industry  and  commerce. 

I  have  made  clear  the  distinction  between  the  direct  and 
indirect  financing  of  industry  by  banks.  Great  banks  in 
Continental  Europe  often  buy  the  stocks  of  new  corpora- 
tions, hold  them  permanently,  put  bank  officers  on  the 
boards  of  directors,  and  supervise  closely  the  operations 
of  the  companies.  In  America,  while  officers  of  commer- 
cial *  banks  often  are  members  of  boards  of  directors  of  the 
companies  which  borrow  heavily  from  the  banks,  the  prac- 
tice is  to  make  short-time  loans  to  such  companies  (in 
form,  if  not  in  fact),  and  to  lend  on  their  securities,  rather 
than  to  buy  them.  Our  banks  own  securities  in  enormous 
amount,  but  they  are  chiefly  seasoned  bonds,  rather  than 
stocks  of  new  or  even  well-proved,  enterprises. 

It  is  commonly  supposed,  too,  that  collateral  loans  are 
chiefly  or  almost  wholly  made  to  speculators,  who  buy  se- 
curities in  the  expectation  of  holding  them  only  till  investors 
take  them  off  their  hands,  and  that  investors  buy  them,  not 
with  bank-credit  derived  from  loans,  but  with  money  or 
bank-credit  which  they  accumulate  by  saving  out  of  cur- 
rent income.  It  is  particularly  true  of  the  higher  grade 
securities,  which  savings  banks  and  insurance  companies 
can  buy,  that  this  is  the  case.  The  bank-credit  thus  serves 
for  temporaiy,  rather  than  for  permanent  financing,  to  the 
extent  that  this  is  true.  I  think,  however,  that  the  extent 
to  which  bank-credit  serves  for  permanently  financing  in- 
dustry is  underrated.  A  good  many  investors  have  learned 
that  the  short-time  money-rates  arc,  on  the  long  time  aver- 
age, lower  than  the  yield  on  long-time  securities.^    They 

'  Our  great  private  banks,  bond  houses,  and  investment  bankers,  etc.,  of 
course  do  buy  stocks  of  new  enterprises  un  a  hugv  scuilc.  Many  uf  uur  big 
commerciai  banks  ha\e  taken  part  in  undenvriting  operations. 

•  See  pp.  428-432,  supra. 


524 


THE   VALUE  OF  M(JNI:Y 


11 


hiive  learned,  too,  that  high-yield  securities — securities 
high  in  yield  as  compared  with  the  long-time  average  of 
money-rates -can  be  obtained  which  can  safely  be  carried 
on  margins  of  thirty,  forty  and  fifty  points,  without  danger 
that  even  such  catastrophes  as  the  slump  in  security  prices 
at  the  outbreak  of  the  War  will  wipe  the  margins  out.  The 
old  distinction  between  investors  and  speculators,  the 
former  those  who  buy  for  the  yield,  and  the  latter  those 
who  buy  for  an  anticipated  rise  in  capital  value,  no  longer 
corresponds  to  the  distinction  between  those  who  buy  out- 
right and  those  who  buy  on  a  margin.  The  investor,  buy- 
ing a  6  or  f'i  preferred  stock,  carrying  it  on  a  forty 
point  margin,  with  money  from  his  bank  or  broker  at 
4  or  $^l ,  is  making  6  or  y'  I  on  his  own  forty  dollars,  and  is 
making  the  dilTerencc  between  6  or  7^,'  and  4  or  5'^;  on  the 
sixty  dollars  lent  him  by  his  banker  or  broker.  He  sub- 
stantially increa.ses  his  yield  thereby,  and  his  risks,  if  he 
chooses  his  stocks  carefully,  and  scatters  them  among  a 
number  of  issues,  are  not  great.  For  the  banker  or  broker, 
such  a  loan  is  perfectly  satisfactory.  The  margin  of  se- 
curity is  wider  than  that  demanded  on  more  speculative 
securities.  Such  a  borrower  will  receive  consideration 
when  more  speculative  loans  are  being  called,  or  not  re- 
newed. The  investor  of  this  tjpe  is.  in  effect,  engaging  in 
a  form  of  banking  business.  He  is  lending  to  the  corpora- 
tion funds  which  he  has  borrowed  from  others;  he  has  {)ut 
up  his  own  capital  for  the  same  purpose  that  the  bank  uses 
its  capital  -  ..o  supi)l)'  a  margin  of  safety  to  those  who  have 
taken  his  short-term  promises  to  pay.  Like  the  bank,  too, 
he  converts  rights  to  payments  at  a  later  date  into  rights 
to  pa>Tnent  at  an  earlier  date.  He  is  (tne  of  the  links  in  the 
chain  whereby  the  wealth  of  low  saleal)ility  employed  in 
industry  becomes  distilled  and  refined  till  it  enters  the 
i-.oney  market.     His  profits  ctmie  in  the  dilTerence  in  the 


t-KKUIT      BANK   ASSETS   AND   BANK   RESERVES 


J-^J 


yield  as  Ix'twcen  more  saleable  and  less  saleable  forms  erf 
rights. 

The  extent  of  this  practice  cannot  be  stated,  so  far  as  any 
data  to  which  the  present  writer  has  access  are  concerned. 
The  writer  has  met  the  practice  in  a  go(Hl  many  cases.  One 
brokerage  house,  with  whose  operations  the  writer  has  con- 
siderable acquaintance,  makes  a  practice  of  advising  its 
more  conservative  customers  to  do  this.  A  good  many 
brokerage  houses  sell  investment  securities  on  the  "in- 
stalment plan,"  which  often  means,  in  practice,  that  the 
initial  margin  put  up  by  the  investor  is  his  only  pa>'ment, 
and  that  the  security  is  gradually  paid  for  by  letting  the 
yield  increase  the  margin.  During  the  extremely  easy 
money  of  the  present  War  peritKl.  occasional  reference  has 
been  made  in  the  financial  pajjers  to  the  practice  of  buying 
even  the  highest  grade  bonds  on  this  basis — the  yield  of 
the  bonds  being  very  substantially  higher  than  the  money- 
rates,  giving  a  comfortable  profit  to  those  who  hold  the 
bonds  on  a  margin. 

That  the  practice  is  not  wider  spread  is  due  primarily, 
probably,  to  the  tem|x;ramental  tjualities  required.  The 
investor,  proper,  is  commonly  a  verj'  conservative  person, 
who  has  an  unreasoning  distrust  of  speculation,  and  to 
whom  the  word,  "margin,"  necessarily  suggests  specula- 
tion. That  buying  a  stock  on  a  margin  is  the  same  sort  of 
thing  as  buying  the  equity  in  a  mortgaged  farm,  does  not 
occur  to  him.  On  the  other  hand,  the  man  who  knows  the 
market  well  enough  to  be  willing  to  deal  on  margins,  fre 
quently  is  not  content  with  the  slow  process  of  accumula- 
tion whii  ii  comes  from  annual  yields,  and  prefers  to  take 
larger  channs  in  speculation  on  capital  values.  But  there 
is  an  intermediate  class,  who  buy  investment  securities, 
with  narrow  rani,'e  of  fluctuation  in  capital  values,  for  the 
sake  of  the  yield,  and  who  buy  them  on  margins,  margins 


536 


THE  VALUE  OF  MONEY 


ni 


li: 


ample  to  enable  them  to  sleep  at  night,  and  to  neglect  the 
daily  market  reports.  I  think  that  there  are  indications 
that  this  class  is  growing  larger,  and  more  important. 
Doubtless  much  more  important  than  individual  "bankers" 
of  this  sort,  however,  is  the  enormous  number  of  houses 
dealing  in  securities,  "wholesalers"  and  "retailers,"  who 
find  profit  on  their  "wares"  even  while  on  their  "shelves," 
through  the  differential  between  the  yield  and  the  charge 
made  by  commercial  banks  on  collateral  loans.  A  very 
large  percentage  of  collateral  loans  is  made  to  institutions 
of  this  type.  As  this  practice  becomes  more  important,  the 
result  must  be  to  widen  the  money  market,  to  increase  the 
proportion  of  banking  capital  that  goes  permanently  into 
financing  industry,  and  to  reduce  the  difference  in  yield 
between  short-time  paper  and  long-time  securities — in 
other  words,  to  bring  the  "money-rates"  closer  and  closer 
to  the  long-time  interest  rates. 

This  would  have  seemed  very  strange  and  weird  to  Adam 
Smith.  It  means,  in  effect,  that  the  bulk  of  our  banking 
credit  is,  directly  or  indirectly,  fmancing  our  industry 
rather  than  our  commerce.  Adam  Smith  thought  that  a 
bank  could  safely  lend  to  its  customers  only  so  much  as  they 
would  otherwise  keep  by  them  in  the  form  of  money.  Per- 
haps this  notion,  as  growing  out  of  some  s[)eculations  re- 
garding the  general  thet)r>'  of  money,  should  not  be  taken 
as  the  statement  of  Smith's  practical  attitude  on  the  matter, 
but  that  practical  attitude,  as  clearly  expressed  in  the 
paragraph  ■  following,  is  that  a  bank  can  afford  to  lend 
only  for  mercantile  operations  that  are  carried  through  in  a 
very  moderate  time,  that  the  bank  can  afford  to  supply  only 
the  minor  part  of  the  circulating  capital,  and  no  part  of 
the  fixed  capital,  of  a  merchant,  or  manufacturer,  no  part  of 
his  forge  and  smelting  house,  etc.    Such  loans  lack  the 

■  Wealth  of  Xalions,  Bk.  II,  ch.  2,  cd.  Cannan,  I,  pp.  187  and  ^90-291. 


CREDIT-  BANK  ASSETS  AND  BANK   RESERVES         527 

liquidity  which  the  bank  must  insist  upon.    Only  those 
persons  who  have  withdrawn  from  active  business,  and  are 
content  with  the  income  upon  their  capital,  can  afford  to 
lend  for  such  purposes.    The  theory  is  sound,  on  the  basis 
of  the  facts  as  Smith  knew  them.    But  modem  corporate 
organization  and  modem  stock  markets  have  changed  all 
that.    Anything  that  is  highly  saleable  can  come  into  the 
money  market,  and  the  modem  corporation  organization 
of  business,  coupled  with  organized  stock  exchanges  and  a 
large  and  active  body  of  speculators,  has  made  the  forge 
and  the  smelting  house  as  saleable  as  the  finished  product. 
This  is  not  to  accept  Schumpeter's  doctrine,'  so  far  as 
the  United  States  are  concerned,  that  it  is  primarily  the 
bankers,  the  manufacturers  of  bank-credit,  who  make  the 
decisions  that  turn  industry  from  old  to  new  lines.    They 
do  not,  on  the  whole.    In  Continental  Europe,  particularly 
Germany,  they  do  to  a  much  greater  extent.    Criticism  has 
been  made  of  our  American  commercial  bankers,  as  con- 
trasted with  German  bankers,  that  the  former  are  para- 
sites, who  insist  on  sure  things,  and  refuse  to  take  chances 
with  other  business  men  in  the  development  of  industry. 
To  the  present  writer,  our  banking  system  seems  to  be 
rather  a  more  developed  system  than  that  of  Germany,  in 
that  the  "division  of  labor"  has  gone  further  with  us,  and 
risk-bearing  and  the  manufacturing  of  bank-credit  have 
been   more    sharply    differentiated.    We    have    bankers 
enough  who  are  "risk-bearers."    But  they  are,  on  the 
whole,  "private  bankers."  "investment  bankers,"  and  the 
like,  who  do  not  manufacture  a  great  deal  of  deposit  credit, 
but  rather  borrow  heavily  from  the  commercial  banks, 
which  are  the  great  manufacturers  of  bank-credit.    Under 
our  system,  the  decisions  which  divert  industry  from  old  to 
new  lines  are  more  democratically  made,  by  speculators 

»  Theorie  der  wirtschafUkktn  EntwitMung,  ch».  2  and  3. 


52« 


Tin;    VALUE   OF   MOVF.Y 


and  investors  under  the  leadership  of  private  hankers,  and 
sometimes  without  that  leadership.  These  constitute  the 
imi)orlant  intermediary  which  transforms  stock  exchange 
securities  into  the  basis  of  bank-K)ans.  The  commercial 
banker  buys,  in  general,  not  the  stocks,  but  the  note  of  the 
private  banker,  broker,  sjK'culator,  or  investor,  with  the 
stocks  as  collateral.  If  investment  bankers,  speculators  and 
investors  decide  to  supjwrt  ol<l  ways  of  doing  things,  the 
banks  lend  on  the  securities  of  the  okl  kinds  of  businesses; 
if  investment  bankers,  siK-culators  and  investors  turn  to 
new  things,  the  commercial  banks  follow  suit.  Commercial 
banks  can  and  do  «liscourage  certain  tyjx's  of  enteq)rises 
by  refusing  loans  with  their  securities  as  collateral,  or  by 
recjuiring  very  heavy  margins  with  such  loans,  but  even 
these  may  be  developetl,  and  are  with  us  on  a  large  scale 
develo[)etl.  on  banking  cretlit,  advanced  by  the  speculators 
and  private  bankers  who  borrowe<l  it  from  the  commercial 
banks  with  other  securities  as  collateral.  The  commercial 
banks  of  the  United  States  may  to  a  very  considerable  de- 
gree check  dynamic  tendencies,  but  in  general,  they  do  not 
lead  and  direct  them.  Bank-credit,  directe<l  by  others 
than  commercial  bankers,  does,  however,  enormously  fadl- 
itate  both  the  starting  of  new  enteq)rises  and  social  read- 
justment to  them. 

How  far  can  the  total  wealth  of  the  country,  agricultural 
as  well  as  industrial.  Im;  brought  into  the  circle  of  the  money 
market?  The  full  answer  to  the  question  would  go  far 
beyond  the  limits  of  this  book.  If  agriculture  can  Ix' 
brought  under  the  control  of  large  corporations,  there  is 
little  reason  for  supposing  that  it,  too,  might  not  come  in. 
There  are  some  peculiarities  of  agriculture,  special  dangers 
of  drought  and  Ho<kI.  dangers  of  over-production  and  low 
prices,  wide  seasonal  fluctuations  in  comlitions.  whi»h 
make  it  hard  to  standardize  in  any  case.     liut  mining  ;iad 


li^ 


CREDIT- BANK  ASSETS  AND  BANK  RESEBVE8        529 


even  the  manufacturing  of  such  things  as  primary  steel 
products  have  wide  variations  in  prosperity  too.  So  long, 
however,  as  agriculture  remains  a  matter  of  families  on  a 
homestead —and  for  social  and  political  reasons,  we  may 
hope  that  this  will  always  be  the  case— it  is  difBcult  to 
bring  it  in.  Bonds  of  agricultural  associations  or  of  agri- 
cultural banks  have  had  limited  sale  on  the  bourses  of 
Europe.  The  present  writer,  for  example,  found  it  im- 
ix)ssible  to  find  in  four  great  libraries  m  New  York  and 
Boston  any  quotation  of  the  bonds  of  the  Bayerische  Land- 
wirtschaftshank.  Apparently,  in  general,  such  securities 
have  not  high  saleability.  While  this  remains  true,  agri- 
culture may  expect  to  remain  under  a  handicap  of  higher 
interest  rates  than  industry  and  commerce. 

If,  however,  all  forms  of  wealth  couUl  be  made  equally 
saleable,  we  should  find  interest  rates  rising  for  those  loans 
and  securities  which  now  have  the  highest  saleability. 
They  would  lose  the  peculiarity  which  now  enables  them  to 
perform  a  service  as  bearer  of  options.  Money-rates  and 
long-time  rates  of  interest  would  tend  to  come  together. 
Long-time  rates  on  formerly  unsaleable  loans  would  fall, 
and  rates  on  highly  saleable  loans  would  rise.  The  present 
low  rates  in  the  "money  market"  grow  out  of  differential 
advantages. 

We  turn  now  to  the  third  important  aspect  of  the  tech- 
nique of  banking,  namely,  the  matter  of  cash  reserves. 
First  I  would  point  out  that  this  is  merely  a  part  of  the  more 
general  problem  of  liquid  assets.  The  difference  between 
cash  and  liquid  paper  is  a  matter  of  degree.  There  is  large 
possibility  of  substitution  of  the  one  for  the  other,  as  it  be- 
comes more  profitable  to  use  one  or  the  other.  When 
money-rates  are  low,  it  may  well  be  worth  while  to  carry 
large  reserves;  when  money-rates  are  higher,  the  gains  to  be 
made  by  substituting  paper  for  cash  in  the  bank's  assets 


530 


THE  VALUE  OF  MONEY 


ti: 


!     : 


i  -i 


i! 


are  much  Kreater.  I  have  pointed  out  the  use  which  pfreat 
European  banks,  notably  the  Austro-HunKarian  Bank, 
make  of  foreign  bills  of  exchange  as  "reserve,"  selling  bills 
when  money  is  "easy,"  and  the  yield  on  bills  is  small,  buy- 
ing bills  when  money  is  "tight,"  and  the  yield  on  bills  is 
large.*  The  great  Joint  Stock  Banks  of  England,  the 
chief  sources  of  bank-credit  in  the  great  banking  country 
of  the  world,  also  make  use  chiefly  of  deposits  with  the 
Bank  of  England  as  their  "reserves."  Some  cash  they 
keep,  but  it  is  "till  money."  rather  than  reserve.  They 
carry,  also,  "secondary  reserves"  in  highly  liquid  paper, 
stock  exchange  loans  anfl  commercial  bills.  The  differences 
are  differences  in  degree.  The  Bank  of  England  does  keep 
a  large  reserve  in  cash  (including  notes  of  the  Issue  Depart- 
ment and  gold  bullion)  but  it  denies  that  it  has  any  definite 
ratio  in  mind,'  and  it  protects  its  reserves,  when  they  are 
low,  not  by  ceasing  to  loan,  but  by  raising  its  discount- 
rate.    The  whole  thing  is  highly  flexible. 

This  is,  in  general,  true  throughout  the  world,*  where 
banking  is  highly  developed.  A  country  which  has  ex- 
panding business,  based  on  rising  values  of  goods  and  rising 
capital  values  of  anticipated  incomes,  which  in  turn  grow 
out  of  increasing  business  confidence,  etc..  and  out  of  the 
development  of  new  enterprises  which  make  readjustment 
necessary,  expands  its  bank-tredit  to  meet  the  situation. 
Expanding  bank-credits  in  time  grow  so  large  that  bankers 
feel  larger  cash  reser\es  to  be  desirable.  Their  reserves 
may  be  also,  in  some  measure,  drawn  upon  by  the  growing 

'  Supra,  chapter  on  "Volume  of  Money  and  Volume  of  Crrdlt." 

*  Inlcrvirxs  on  Ike  Banking  ami  Currency  Systems  of  England,  Scotiand, 
etc.,  Senate  Doiumcnt  No.  405,  1910  (National  Monetary  Commission 
Report),  p.  J5. 

•  This  is  clearly  the  opinion  of  Kuropean  bankers,  as  indicated  in  their 
statements  to  interviewers  for  the  .Monetary  fonimisMon.  See,  e.  g.,  state- 
ments by  the  Pailschi-  Bank,  Ibid.,  pp.  J74-J75.  and  the  Cridit  Lyonnais, 
Ibid.,  p|).  124-220. 


CKEDIT— BAKK  ASSETS  AND  BANK  RESERVES 


53  « 


retail  trade  and  wage-payments,  which  call  for  more  money 
in  circulation.  They  meet  the  situation  by  raising  money- 
rates.  This  tends  to  prevent  the  exp<>rtation  of  gold,  and 
tends  to  encourage  the  importation  of  gold,  which  finds  its 
way  into  bank  reserves.  Banks  may  even  borrow  directly 
from  banks  in  other  countries,  to  get  the  gold  they  need,  or 
to  prevent  the  exportation  of  the  gold  they  have.  The 
higher  money-rates,  also,  tend  to  check  marginal  borrow- 
ing— the  borrowing  by  those  who  see  only  very  small 
profits  to  be  made  by  the  use  of  the  bank -credit  they  borrow. 
If  the  rising  values  of  goods,  however,  and  the  profits  to  be 
made  by  effecting  exchanges,  speculative  and  other,  are 
large,  the  volume  uf  bank-credit  will,  none  the  less,  grow. 
If  the  tide  of  rising  business  confidence  is  strong,  the  banks 
will  be  disposed  to  accept  securities  and  rights  as  collateral 
which  they  would  distrust  at  other  times.  A  very  big 
difference  indeed  may  appear  between  bank  reserves  in 
active  times  and  bank  reserves  in  dull  times.  The  banks 
need  less  reserves  in  proportion  to  deposits  in  active  times, 
because  the  very  activity  itself  increases  the  liquidity,  the 
saleability.  of  their  paper  assets,  and  so  makes  actual  cash 
less  necessary.  Even  in  this  country,  the  practice  of 
counting  deposits  in  other  banks  as  reserve  is  well  devel- 
oped. This  is  not  only  true  of  country  banks,  or  banks 
outside  the  reserve  cities.  It  has  been,  in  considerable 
degree,  the  practice  of  the  big  trust  companies  in  New  York 
City.  It  b  the  practice  of  private  bankers  connected  with 
the  stock  exchanges,  and  the  practice  of  brokers,  who  are, 
for  many  purposes,  bankers,  especially  those  who  allow 
their  customers  to  check  on  their  accounts.  Such  houses 
may  carry  no  cash  at  all.  One,  with  whose  workings  the 
writer  is  somewhat  familiar,  makes  the  rule — "We  pay  by 
check  and  receive  only  checks."  None  the  less,  this  house 
allows  its  customers  to  check  upon  it.  and  checks  drawn  on 


MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No    2) 


1.0 


I.I 


1*0 


2.5 

12.2 

2£ 
1.8 


A     APPLIED  IIVMGE 


'653   Last   Main   Street 
Rochester,    New   York        14609 
(716)   482  -  0300  -  Ptione 
(716)   288  -  5989  -Fa, 


USA 


532 


THE  VALUE   OF  MOXEY 


i: 


i 


ii 


it  perform  all  the  functions  of  checks  drawn  on  banks  which 
keep  a  cash  reserve.  Of  course,  our  new  Federal  Reserve 
system  is  built  in  part,  on  the  principle  of  collecting  re- 
serves in  cent'  :  reservoirs,  and  our  banks  will  doubtless 
increase  the  practice  of  counting  deposits  with  other  banks 
as  reserve.'  They  will  feel  the  need  for  less  reserves,  also, 
with  a  wider  rediscount  market. 

Within  a  given  country,  I  think  that  we  may  safely  gen- 
eralize the  doctrine  that  the  causal  relation  between  re- 
serves and  deposits  is  exactly  the  reverse  of  that  asserted 
by  the  quantity  theory,  within  very  wide  limits  indeed. 
That  is  to  say,  increasing  reserves  are  a  result,  and  not  a 
cause,  of  increasing  loans  and  deposits.  We  shall  further 
hold  that  the  relation  between  them  instead  of  being  defi- 
nite, is  highly  flexible.  This  is  not  to  assert  that  reserves 
may  not  increase  without  a  prior  increase  in  loans  and 
deposits.  That  has  happened  in  the  United  States  during 
the  present  War.  It  does  mean,  however,  that  increasing 
loans  and  deposits  will  pull  gold  into  a  country,  and  that 
increasing  reserves  do  not  force  increasing  deposits  and 
loans.  2  If  a  country's  business  is  growmg,  if  that  business 
is  soundly  based,  so  that  expectations  are  being  met,  obliga- 
tions being  paid  out  of  the  income  which  arrives,  on  sched- 
ule time,  to  meet  anticipations,  there  need  be  no  effective 
check  to  the  amount  of  gold  that  will  come  into  the  country 
to  serve  as  reserves,  within  limits  that  are  rarely  reached. 
It  is  miscalculation,  maladjustment  of  costs  and  prices  in 
particular  enterprises,  failure  of  "interstitial  adjustments,'* 

'The  item,  "Due  from  other  banks  and  bankers"  in  our  table  of  total 
bank  resources  for  1909,  is  2,563  millions— about  12%  of  the  whole  and 
slightly  more  than  the  amount  we  assigned  to  "commercial  paper."  It 
is  a  highly  important  factor  making  for  liquidity.  For  State,  and  National 
ba.iks  and  trust  companies  it  is  almost  as  gieat — 2,302  millions.  The  first 
figure  does  not  include  many  great  private  banks. 

'  Vide  Professor  Taussig's  history  of  the  years,  1878-1890,  in  his  Siiver 
Situation. 


mM. 


CREDIT — BANK  ASSETS  AND  BANK  RESERVES 


533 


especially  failure  of  particular  crucial  links  in  the  business 
chain,  as  the  businesses  engaged  in  producing  iron  and  steel, 
to  respond  to  the  needs  of  other  expanding  businesses, 
that  check  movements  of  expansion  in  business,  not  in- 
adequacies of  bank  reserves.^  As  long  as  only  wise  plans 
are  made,  as  long  as  they  meet  no  mishaps,  as  long  as  the 
carrying  out  of  the  new  plans  does  not  itself  so  change  the 
facts  on  which  the  calculations  of  business  men  have  been 
based  as  to  cut  imder  anticipated  profits,  so  long  may 
business,  within  a  given  country,  expand  without  danger 
from  madequate  reserves.  Of  course,  if  the  whole  world  is 
simultaneously  expanding,  the  competition  for  gold  in  the 
international  money  markets  may  be  so  severe  that  all 
may  be  hampered. 

That  reserves  will  increase,  as  expanding  credit,  due  to 
increasing  business  or  rising  prices,  requires  increased  re- 
serves, can  hardly  be  disputed,  I  think,  if  we  look  at  a 
coimtry  of  small  size,  or  (what  is  the  same  thing  from  the 
angle  of  economic  analysis,  so  far  as  the  present  problem 
is  concerned)  if  we  take  a  particular  part  of  a  country. 
Seasonal  movements  of  cash  for  reserves  in  this  country 
have  been  obviously  determined  by  the  movements  of 
credit,  rather  than  the  reverse.  Expanding  business  at 
crop  moving  seasons,  requirmg  advances  of  credit  by  coun- 
try banks,  and  an  unusual  drain  on  the  cash  resources  of 
the  country  banks,  has  regularly  meant  that  the  country 
banks  draw  cash  from  the  New  York  banks.  When  the 
need  for  such  cash  in  the  country  banks  passes,  when  they 
can  no  longer  employ  it  to  advantage  at  home,  they  send  it 
back  to  New  York.  New  York,  to  meet  the  emergency 
caused  by  the  withdrawal  of  cash,  draws  to  a  considerable 
extent  on  Europe  for  gold.  It  is  not  as  easy  for  New  York  to 
get  gold  quickly  from  Europe  as  it  is  for  France  to  get  gold 
'  Cf.  Mitchell's  Business  Cycles,  pp.  495-496;  and  passim. 


m 


1 ' 

I 


534 


THE  VALUE  OF  MONEY 


in  an  emergency  from  England.  More  time  is  required. 
Inelasticity,  too,  in  the  forms  of  currency  most  needed  for 
small  transactions,  has  made  very  real  difficulties  for  us. 
But  that,  within  the  country,  the  sections  whose  business 
and  credit  were  expanding  take  cash  reserves  from  those 
sections  where  credit  is  less  urgently  demanded,  needs  no 
debating.  This  is  seasonal.  But  the  same  thing  is  true 
in  the  long  run.  As  business  and  bank-credit  have  ex- 
panded, year  by  year,  in  Oklahoma,  Oklahoma's  cash  re- 
serves have  grown.  Bank-credit  in  a  country  cannot  go  on 
inc' -finitely  mounting,  if  bankers  are  making  unsound 
loans,  if  the  values  on  which  the  loans  rest  are  based  on  vain 
ima^'inings,  if  anticipated  profits  are  not  realized.  But  if 
a  country  have  rich  resources  and  intelligent  entrepreneurs, 
with  sagacious  bankers  who  can  discriminate  between 
sound  and  unsound  business,  it  may,  within  very  wide 
limits  indeed,  expand  its  bank-credit  without  check  from 
inadequate  reserves,  as  its  business  expands,  and  as  prices, 
particularly  prices  of  lands  and  securities,  rise.* 

If  the  country  in  question  be  a  very  large  country,  how- 
ever,— large  in  the  sense  that  its  business  and  volume  of 
bank-credit  are  very  large,  and  particularly  in  the  sense  that 
bankers'  assets  are  of  such  character  that  a  large  volume 
of  reserves  is  desirable — restraints  on  the  process  of  expan- 
sion may  come.  Reserves  will  come  in,  but  the  resistance 
in  stiffer  money-rates  will  be  felt.  Bankers  in  other  coun- 
tries will  compete  with  the  bankers  in  the  country  in  ques- 
tion for  reserves.  Rising  money-rates  will  put  an  end  to 
many  marginal  exchanges.  They  will  lessen  the  saleability 
of  many  rights  which  might  otherwise  be  available  as  bank- 
ing collateral.  The  extension  of  bank-credit  will  feel  a 
drag.    There  is  large  flexibility  here.    But,  in  a  long  run 

'C/.  the  chapter,  supra,  on  "The  Quantity  Theory  and  International 
Gold  Movements." 


CREDIT— BANK  ASSETS  AND  BANK  RESERVES         535 

period  of  many  years,  the  volume  of  gold  in  the  world  will 
impose  a  maximum  limit  upon  the  possibility  of  expansion 
of  bank-credit  in  the  world  as  a  whole.  This  limit  is  doubt- 
less never  reached.  Within  the  limit,  the  variations  in  the 
volume  of  the  world's  credit  are  primarily  determined  by 
the  other  concrete  factors  we  have  been  discussing.  Pro- 
portionality between  the  world's  gold  and  the  world's  vol- 
xune  of  credit  does  not  at  all  obtain.  Under  certam  con- 
ditions, much  higher  proportions  of  reserves  to  bank-credit 
will  be  found  in  a  given  country  than  at  other  times,  and 
the  same  will  be  true  in  the  world  at  large. 

I  would  refer  again  to  the  discussion  by  J.  M.  Keynes, 
quoted  in  Part  11.^    Reserves  have  absorbed  enormous 
quantities  of  gold,  easily  obtained  as  a  consequence  of 
abundant  gold  production,  in  the  past  fifteen  years.    Pro- 
portions of  gold  reserves  to  bank-credit  have  grown.    In 
the  preceding  period,  when  gold  production  went  on  less 
rapidly  than  business  development,  percentages  of  reserves 
were  lowc      Most  bankers  feel  better  with  large  reserves. 
When  they  can  get  gold,  they  prefer  gold  to  other  sub- 
stitutes.   When  they  cannot  easily  get  gold,  they  use  other 
substitutes,  of  the  various  kinds  of  paper,  particularly, 
which  have  been  described.    Gold  differs  from  other  things, 
in  bankers'  assets,  in  degree,  rather  than  in  kind.    Instead, 
therefore,  of  the  law  of  the  proportionality  of  reserves  to 
volume  of  bank-credit,  I  venture  the  generalization  *  that, 
as  gold  production  increases  rapidly,  the  tendency  is  for 
the  proportion  of  gold  reserves  to  volume  of  bank-credit  to 
rise;  with  diminished  gold  production,  the  tendency  is  for 
the  proportion  of  reserves  to  fall,  assuming  that  the  factors 
other  than  volume  of  gold  production  which  make  for  ex- 
pansion of  business  maintain  themselves. 

»  "The  Prospects  of  Money,"  British  Economic  Journal,  Dec.  1914- 
» C/.  Conant's  discussion,  Principles  of  Money  attd  Banking,  I,  ch.  7- 


Si^ 


THE   VALUE   OF   MONEY 


Increasing  volume  of  gold  tends  to  increase  the  volume 
of  trade.  But  there  are  other  causes  for  the  increase  or 
decrease  of  trade  as  well.  These  causes,  working  in  har- 
mony with  rapidly  expanding  volume  of  gold,  lead  to  a  very 
rapid  growth  of  trade.*  Working  in  the  face  of  a  dra;; 
from  less  rapidly  growing  gold  supply,  they  strain  the  pos- 
sibilities of  bank-credit  expansion.  Various  substitutes 
for  gold  in  bank  reserves  are  employed.  Substitutes  in  th  j 
form  of  other  forms  of  credit  are  employed.  Barter  i  > 
resorted  to  increasingly.  Methods  of  employing  other 
things  than  gold  in  the  retail  trade  of  a  country  are  resorted 
to.  "Gold-exchange"  standards  are  devised.  Countries 
"  wait  their  turns  "  to  come  on  the  gold  standard.  Coopera- 
tion, not  only  within  countries,  but  among  countries,  seeks 
to  economize  the  scanty  stock  of  the  precious  metal.  Very 
large  slack  is  thus  revealed.  But  the  expansion  of  business 
is  checked,  the  volume  of  business  confidence  is  reduced, 
the  values  of  future  incomes  in  enterprises  is  lowered,  pro- 
duction is  checked,  and  prices  are  reduced,  (a)  because  the 
value  of  money  rises;  and  (b)  because  the  values  of  goods 
and  income-bearers  is  reduced.  The  exchange  side  of  pro- 
duction is  hampered.  Substitutes  for  gold,  through  in- 
creased activities  of  bankers  and  other  agents  of  exchange, 
are  costly.  Greater  tolls  on  values  are  taken  by  those  who 
handle  the  mechanism  of  exchange.  It  does  make  a  differ- 
ence whether  or  not  the  world's  gold  is  abundant!  But  the 
difference  is  not  made  solely,  or  even  mainly,  in  the  price- 
level.  ^ 

The  reserve  function  of  money  is  essentially  a  dynamic 
function.  The  reserve  function  is  merely  a  phase  of  the 
bearer  of  options  function.'    It  is  the  practice  of  quantity 


'  Tliis  would  seem  to  be  Mitchell's  view.    Cf.  Business  Cycles,  p.  494. 

=  C/.  chapter  XIII. 

'  Cf.  the  chapter  on  "The  Functions  of  Money,"  supra. 


CREDIT— BANK  ASSETS  AND  BANK  RESERVES         537 

theorists  to  speak  of  "normal"  ratios  between  reserves  and 
deposits  (or  reserves  and  demand  liabilities),  and  to  speak 
of  the  "static"  laws  governing  this  relation.    This  is  true 
of  Kemmerer,  of  Fisher,  of  A.  P.  Andrew,  and,  in  general, 
of  contemporary  quantity  theorists.    Kemmerer  very  ex- 
plicitly puts  it  as  a  matter  of  static  theory,  "If  we  divide 
the  money  of  the  country  into  two  parts;  one,  that  used 
directly  in  daily  cash  transactions,  and  the  other,  that  kept 
in  ^mks  as  reserves,  it  may  be  said  that,  under  perfectly 
static  conditions  [italics  mine],  the  proportion  of  the  total 
represented  by  each  of  these  parts  would  be  constant. 
Each  banker  would  find  from  experience  what  proportion 
of  reserve  to  liabilities  it  was  advisable  for  him  to  main- 
tain, and  would  order  his  business,  as  far  as  possible,  so  that 
his  reserve  would  neither  exceed  nor  fall  below  that  most 
desirable  proportion."  *    Kemmerer  quotes  the  following 
passage  from  A.  P.  Andrew:  "In  the  long  run,  as  apart 
from  cyclic  oscillations,  the  quantity  of  bank-credit  is  gov- 
erned by  the  quantity  of  money. "  -    Fisher's  view  we  have 
considered  at  length  in  Part  II.    It  is  essentially  the  same. 
He  is  working  with  the  statics  of  the  problem  of  money 
and  credit.    These  different  writers  differ  greatly  in  the 
extent  to  which  they  would  insist  on  the  validity  of  their 
static  tendency  in  real  life.    Professor  Fisher,  as  we  have 
seen,  is  exceedingly  uncompromising,  holding  tenaciously 
to  his  principle  as  subject  only  to  slight  modification 
during  transition  periods.    Professor  Kemmerer,  in  the 
chapter  from  which  the  quotation  just  given  is  taken,  gives 
an  important  realistic  analysis  of  dynamic  conditions,  and 
makes  liberal  concessions  to  the  view  that  the  ratio  is  not 
constant  in  real  life.^    Professor  Taussig,  whose  view  was 

'  Money  and  Credit  Instruments,  p.  80. 
■^7Wrf.,  p.  82.    Italics  mine. 

3  Kemmerer,  in  general,  is  less  concerned,  apparently,  with  defendrng  a 
causal  quantity  theory  than  with  defending  the  "equation  of  exchange." 


![ 


538 


THE  VALUE  OF  MONEY 


summarized  at  length  in  chapter  IX,  finds,  in  real  life,  so 
many  exceptions  to  the  doctrine  of  proportionality  of  re- 
serves and  deposits  that  he  virtually  abandons  that  doc- 
trine. What  I  wish  to  insist  on  here,  however,  is  that  there 
are  no  static  laws  possible  in  this  connection.  The  reserve 
function  is  a  dynamic  function.  The  theory  of  reserves 
must  rest  in  an  analysis  of  friction,  of  transitions,  of  dy- 
namic uncertainty  and  dynamic  change.  It  is  a  part  of  the 
general  theory  of  liquidity  of  bank  assets,  of  saleability 
of  rights,  and  the  like.  If  one  can  find  a  "normal"  amount 
of  dynamic  change,  a  "normal"  amount  of  uncertainty,  a 
norm  for  the  coming  of  technical  inventions,  a  normal 
prospect  of  war,  a  normal  rate  of  gold  production,  a  normal 
rate  of  growth  for  population,  a  normal  amount  of  Jew- 
baiting  in  Russia,  with  a  norm  for  migration,  and  if  one  can 
hold  these  norms,  and  a  multitude  of  similar  norms,  in 
fixed  relation  to  one  another,  one  might  have  justification 
for  speaking  of  a  "normal  ratio"  of  bank  reserves  to  bank 
demand  liabilities! 

Apart  from  dynamic  changes,  from  frictional  elements 
which  create  uncertainties,  in  general,  apart  from  uncer- 
tainty and  irregularity  and  lack  of  "normality,"  there  would 
be  no  occasion  for  bank  reserves  at  all !  To  the  extent  that 
static  conditions  are  realized,  bank  cash  reserves  may  be, 
and  are,  dispensed  with.  It  is  well  known  that  England 
gets  along  with  surprisingly  little  gold.  The  total  stock 
in  the  country  has  been  smaller  than  the  gold  reserve  of  the 
Banque  de  France,  and  much  of  the  gold  in  England  was 
in  use  among  the  people,  since  small  paper  money  (before 
the  War)  was  not  in  use  in  England.    The  gold  reserve 

To  the  extent  that  this  is  true,  I  have  little  quarrel  with  his  doctrines.  To 
"prove"  the  "eqii.atiDn  of  exchange,"  however,  is,  first,  a  work  of  superero- 
gation, and,  second,  in  no  sense  a  proof  of  the  quantity  theory.  Vide  the 
chapters,  supra,  on  the  equation  of  exchange  and  on  statistics  of  the  quan- 
tity theory. 


CREDIT— BANK  ASSETS  AND   BANK   RESERVES         539 

of  the  Bank  of  England  has  been  usually  only  a  fraction 
of  that  of  the  Banque  de  France.    Some  years  since,  the 
distribution  of  gold  as  between  England  and  the  United 
States,  was,  roughly,  England  six  hundred  million  dollars, 
the  United  States,  one  billion,  six  hundred  million.    A 
larger  proportion  of  gold  was  in  reserves  in  the  United 
States  than  in  England.    Yet  England  was  doing  the  bank- 
ing business  of  the  world,  while  we  had  trouble  in  doing  our 
own!    The  Bank  of  England  carries  virtually  the  only  re- 
serve in  the  country.   The  Joint  Stock  Banks,  with  demand 
liabilities  vastly  in  excess  of  the  demand  liabilities  of  the 
Bank  of  England,  carry  only  "till  money"  in  cash  or  Bank 
of  England  notes,  and  for  the  rest,  carry  as  their  "reserve" 
their  deposit  credits  with  the  Bank.    A  great  deal  of  criti- 
cism, from  Bagehot  down  (to  go  no  further  back)  has  been 
directed  at  the  "inadequacy"  of  English  bankmg  reserves, 
and  many  dire  predictions  have  been  made  as  to  the  dangers 
that  impended  unless  the  reserves  were  increased.    We 
shaU  probably  he^r  less  of  this  after  the  War!    The  Bank 
of  England  still  stands!    It  has  never  failed  to  pay  out 
gold  over  its  counters,  even  though  it  has,  with  the  aid  of 
the  government,  doubtless  restricted  and  controlled  for- 
eign shipments  of  gold.    But  it  has  met  the  unprecedented 
emergency  better  than  any  other  bank  in  Europe,  and  to- 
day (Sept.  1916)  is  in  exceedingly  good  shape.    Sterling 
exchange  at  New  York  seems  "pegged"  at  the  "lower  gold 
point,"  and  apprehensions  regarding  the  stability  of  the 
English  financial  system  seem  definitely  allayed.    It  is 
aside  from  our  present  purpose  to  discuss  war  time  condi- 
tions.   I  am  rather  interested  in  analyzing  the  features  of 
the  English  money  market  which  have  made  it  possible,  in 
the  period  preceding  the  War,  for  English  bankers  to  get  on 
with  so  little  gold.    As  will  appear,  it  is  because  English  bus- 
iness and  financial  affairs  have  been  more  neariy  "static," 


.I,.. 


S40 


THE  VALUE  OF  MONEY 


have  come  nearer  to  realizing  the  assumptions  of  static 
economic  theory,  than  is  true  of  any  other  country  on  earth. 
The  very  fact,  for  one  thing,  that  England  is  the  great 
international  banker  has  meant  a  scattering  of  risks.  Acute 
panics  do  not  come  in  all  countries  on  the  same  date. 
Bad  business  in  one  country  may  be  offset  by  good 
business  in  another;  drains  of  gold  to  one  country  may  be 
met  with  gold  flowing  in  from  others.  The  same  considera- 
tions which  tend  to  stabilize  the  railroad  business,  as  com- 
pared with,  say.  cotton-growing,  apply  to  the  international 
banker  as  compared  with  the  banks  of  a  single  country  or 
section.  But  further,  the  London  market  has  developed 
cooperating  agencies  for  smoothing  out  friction  and  elim- 
inating uncertainties  to  a  degree  unknown  anywhere  else. 
An  anonjTnous  writer  in  The  Americas  for  April,  1916,'  has 
given  an  exceedingly  interesting  account  of  this  organiza- 
tion of  the  London  market, — the  product  of  the  develop- 
ment of  generations.  Let  us  enumerate  some  of  the  points: 
There  is  nowhere  in  the  world  so  much  expert  judgment  in 
the  grading  and  evaluating  of  hundreds  of  commodities 
from  all  parts  of  the  world.  There  is,  coupled  with  this,  a 
worldwide  reputation  for  the  experts  of  absolute  integrity, 
so  that  producers  in  remote  countries  regularly  ship  ("con- 
sign") to  London  cargoes  without  definite  arrangements, 
knowing  that  there  are  in  London  organized  facilities  by 
which  the  commodities  are  warehoused,  expertly  and  fairly 
judged,  and  either  sold  at  once  or  else  made  the  basis  of  a 
collateral  loan  against  which  they  can  draw  immediately. 
The  institutions  which  make  this  possible  are  (a)  the  system 
of  warehousing,  with  its  certificates  or  warrants  which  give 
absolute  title  to  the  goods,  and  which  are  easily  negotiable; 
(b)  the  organized  arrangements  in  connection  with  the 

'  Published  by  the  Xationa!  City  Bank  of  Xew  York.    Vide  also  Bagchot, 
Lombard  Street,  introductory  chapter,  and  Withers,  The  Meaning  of  Money. 


CREDIT— BANK  ASSETS  AND  BANK   RESERVES         541 

warehouses  by  which  commodities  are  received  and  either 
graded  as  they  are.  or  separated  and  mixed  with  others  to 
form  standard  blends  readily  marketable— this  with  rigid 
integrity  and  expertness  which  the  whole  world  trusts; 
(c)  a  speculative  community  which  has  unlimited  banking 
credit,  ready  to  buy  at  a  concession  in  price  virtually  any 
commodity— honey  in  the  comb,  sealing  wax,  pianos,  farm 
machinery',  what  not;  (d)  the  organized  markets  or  period- 
ical auctions  which  speculation  and  final  purchase  together 
support;  (e)  the  banks,  which,  relying  on  the  standardiza- 
tion of  the  commodities  and  the  readiness  of  the  speculative 
community,  can  without  hesitation  lend  the  money  on 
which  the  distant  shipper  is  relying  to  conduct  his  business. 
What  comes  to  London  is  fluid.    Everything  comes  to 
London!    The  multiplicity  of  items  dealt  in  gives  stability 
to  that  business  which  deals  with  all— the  banking  business. 
The  London  Stock  Exchange  is  no  provincial  affair,  easily 
demoralized  by  an  adverse  rate  decision!    Securities  of 
every  country  on  earth  are  listed  there,  and  speculated  in. 
It  must  be  a  world  catastrophe  which  really  demoralizes 
the  London  stock  market. 

It  will  doubtless  seem  strange  to  many  to  say  that  New 
York  cannot  displace  London  as  the  centre  of  world  finance, 
that  the  dollar  cannot  displace  the  pound  sterling  in  finan- 
cing international  trade,  because  New  Yorkers  do  not  specu- 
late enough!  They  do  speculate  enormously,  but  not  in 
many  things.  A  restricted  list  of  stock  exchange  securi- 
ties—abnost  wholly  American;  cotton— in  which  New 
York  is  the  world  centre;  coffee,  in  which  New  York  has 
the  largest  volume  of  speculative  futures,  though  yielding 
precedence,  ordinarily,  to  Havre,  Hamburg  and  Santos  *  in 

'  This  mfomiation  is  supplied  me  hy  an  nffici.al  of  the  New  York  Coffee 
Exchange,  through  the  courtesy  of  Mr.  \V.  H.  Abom,  of  Abom  and  Cush- 
man,  Coffee  Brokers,  77  Front  St.,  New  York. 


if! 


542 


THE   VALUE   OF  MONEY 


spot  transactions.  There  is  extensive  sujjar  speculation  at 
the  New  York  Coffee  Exchange,  which  has,  indeed,  re- 
cently changed  its  name  to  indicate  the  fact.  There  is  a 
produce  exchange  in  New  York,  but  it  is  a  very  small 
affair  as  compared  with  the  Chicago  Board  of  Trade,  and 
its  operations  and  scope  are  infmitesimal  when  compared 
with  the  produce  speculation  in  London.  Of  course,  there 
is  a  vast  deal  of  unorganized  speculation  in  many  things  in 
New  York,  as  in  business  everjwhere,  particularly  in  Amcr- 
But,  while  the  pecuniary  magnitudes  of  organized 


ica. 


speculation  in  New  York  are  very  great,  the  range  of  items 
dealt  in  is  restricted.  New  York  banks  cannot  possibly 
get  such  a  variety  of  collateral,  based  on  standardized  and 
readily  marketable  gocxls  and  securities,  as  can  London. 
New  York,  consequently,  cannot  finance  international 
trade,  save  as  an  auxiliary  to  London— and  New  York 
banks  must  have  vastly  more  gold  in  their  vaultL  than 
London  bankers  need!  As  goods  and  securities  become 
more  marketable,  gold — whose  ser\'ices  are  needed  because 
of  its  superior  marketability-— becomes  less  necessary. 

The  whole  story  of  London's  organization  would  be  a 
long  one.  London  financial  institutions  have  a  degree  of 
expertness,  growing  out  of  specialization,  in  large  part, 
which  makes  all  manner  of  paper  fluid  in  the  London 
money  market  which  would  lack  fluidity  in  New  York. 
The  Acceptance  Houses  are  a  sort  of  international  Brad- 
street  and  Dun.  They  know  intimately  the  standing  and 
business  of  houses  all  over  the  world.  They  do  not  give 
out  their  information,  but  they  do  put  their  stamp  on  the 
paper  of  business  houses,  thus  standardizing  it,  lending,  not 
money,  but  "pure  credit,"  while  the  other  banks,  relieved 
of  the  necessity  of  investigating  the  paper,  can  buy  it  as 
a  miller  might  buy  No.  i  wheat.  There  is  the  extraordinary 
extension  of  insurance,  so  that  virtually  any  kind  of  risk 


CREDIT   HANK  ASSET'-i  -VND  BANK  RKSKRVES    543 

may  be  shifted  to  those  wen  aule  to  bear  it.  All  this  makes 
for  liquidity,  for  "static"  conditions  in  the  money  market, 
uiul  dispcnsis  with  the  need  for  gold. 

As  we  approach  static  conditions,  we  need  less  and  less 
gokl  reserve  behind  iank  demand  liabilities.  The  static 
law  of  hank  reserves  is  that  none  are  needed!  I  think  we  have 
here  the  real  reason  why  writers  who  have  sought  to  give 
us  the  law  for  a  "normal"  ratio  have  given  us  sue*-  vague 
phrases  as  "shown  by  experience  to  be  necessary,"  and  the 
like.  When  irregularity  of  income  and  outgo  in  a  bank's 
business,  non-liquid  assets,  business  cycles,  uncertainties, 
legislative  changes  affecting  business,  crop  failures,  changes 
in  demand,  new  inventions,  wars,  arc  abstracted  from,  no 
reason  can  be  given  why  a  banker  should  keep  any  reserve 
at  all!  But  these  things  are  dynamic  things.  And  it  is 
characteristic  of  irregularities  that  they  are  irregular.  To 
get  a  "normal "  ratio  out  of  them  is  not  easy. 

On  the  static  assumptions,  an  "ideal  credit  economy"  is 
perfectly  possible.  If  everything  that  needs  to  be  marketed 
is  perfectly  marketable,  if  the  stream  of  business  flows 
regularly  and  without  friction  in  the  same  channels,  if  all 
contingencies  are  foreseen  and  dated  in  advance,  a  bank 
needs  no  cash  reserve.  All  pa>Tnents  can  be  made  by  bank- 
credit.  Banks  bookkeeping  becomes  merely  a  refinement  of 
barter,  with  money  remaining  as  a  measure  of  values,  a  unit 
for  reckoning,  but  not  being  used  as  a  medium  of  exchange, 
or  as  a  bearer  of  options,  or  in  reserves.  The  measure  of 
values  function  is  the  great  static  function  of  money. 

To  the  extent  that  static  assumptions  are  not  realized, 
we  need  money  in  bank  reserves.  This  extent  is  a  thing 
that  varies  from  time  to  time,  and  from  place  to  place.  It 
is  not  the  same  for  a  given  place  from  time  to  time,  nor  is 
it  the  same  at  all  places  at  a  given  time.  It  is  not  the  same 
for  the  whole  world  from  time  to  time. 


544 


THE   VALUE   OF   MONEY 


Since  friction,  preventing  the  free  marketing  of  goods  and 
securities  and  services,  exists,  since  there  are  dynamic 
changes  which  require  readjustments  through  exchanges, 
we  need  the  work  of  the  banker  and  he  needs  cash.  But 
there  are  other  things  than  money  which  make  for  the 
"  statification "  of  the  market.  The  speculator  does  it. 
And  the  other  agencies  of  the  sort  represented  in  the  Lon- 
don market  do  it.  They  are  substitutes  for  gold.  Gold 
has  no  monopol}-.  The  services  performed  by  gold  can  be 
performed  in  many  other  ways,  and  by  many  other  agencies. 
There  is  enormous  flexibility  in  the  matter. 


III; 


''I 


PART  IV.   THE  RECONCILIATION  OF  STATICS 
AND  DYNAMICS 


mm^m^tmsat,ti 


U  I 


CHAPTER  XXV 
THE  RECONCILIATION  OF  STATICS  AND  DYNAMICS 


In  the  foregoing  discussion  of  the  value  of  money  it  has 
appeared  that  the  value  of  money  is  not  an  isolated  prob- 
lem !  Not  only  have  we  found  it  necessary  to  consider  it  as 
part  of  the  general  theory  of  value,  but  it  has  been  advisable 
to  bring  it  into  relation  with  a  large  number  of  the  special 
theorems  of  economics,  including  the  law  of  supply  and  de- 
mand, cost  of  production,  the  capitalization  theory,  the 
doctrine  of  appreciation  and  interest,  the  theory  of  inter- 
national gold  movements,  Gresham's  Law,  the  theory  of 
elastic  bank-credit,  and  the  general  theory  of  prosperity. 
The  book  has  thus  become  a  book  on  general  economic 
theory,  viewed  from  the  standpoint  of  the  theory  of  money. 
It  has  been  as  contributing  to  the  problem  of  the  value  of 
money  that  these  other  doctrines  have  been  discussed,  but 
I  trust  that  they,  too,  have  gained  something  of  clarifica- 
tion from  being  considered  in  this  relation,  and  that  the 
emphasis  on  the  role  of  money  in  general  economic  theory 
has  helped  in  bringing  the  various  elements  in  our  current 
theory  into  a  closer-knit  interdependence. 

The  present  chapter  seeks  to  carry  the  conclusions  so  far 
reached  toward  a  further  unification  of  economic  doctrine, 
by  finding  for  certain  contrasts,  like  that  between  statics 
and  dynamics,  a  higher  synthesis,  so  that  it  may  be  possible 
for  students  of  dynamics  and  students  of  statics  to  speak 
a  common  language,  to  use  common  measures,  to  find  that 
their  phenomena  are  not,  after  all,  of  essentially  different 
nature,  and  to  come  to  agreement  as  to  the  relative  im- 

547 


548 


THE  VALUE  OF  MOXEY 


fir 


n' ■ 


Hi' 


m 


portance  of  "static"  and  "dynamic"  tendencies.  It  will 
appear  that  the  theory  of  money  and  exchange^  plays  an 
important  role  in  effecting  that  higher  synthesis,  and  is 

itself  clarified  by  it.  „ 

The  "theory  of  goods  vs.  the  theory  of  prosperity 
"statics  vs.   dj-namics,"   "normal  vs.  transitional   tend- 
encies."  "long  run  vs.  short  run"  laws,  " market  vs.  normal 
price,"  "abstract  theory  vs.  .- -crete  description,       his- 
torical or  evolutionary  study     ..  cross-section  analysis, 
'•temporal  vs.  logical  priority,"  "causation  as  a  temporal 
seauence  vs.  causation  as  timeless  logical  relationships  - 
these   and  similar  contrasts  have  appeared  frequently  m 
h    history  of  social  thought,  and  have  been  especially  re- 
fined and'elaborated  in  the  history  of  economics.     We 
have  even  compounding  of  the  notions  into  more  com 
puILd  distinctLs,  as  by  Seligman,^  in  his  two  statement 
o    he  law  of  costs:  in  the  short  run,  normal  price  tends  to  be 
th    maximum  cost  of  production;  in  the  long  run  nornial 
price  tends  to  be  minimum  cost  of  production.    Sehgman 
has  illustrated  his  notion  by  an  adaptation  of  the  familiar 
figure  of  the  sea-level  and  the  waves :  for  short-run  pu^oses 
w?may  contrast  the  surface  waves,  the  market  prices,  with 
The  sea  level,  the  normal  price;  for  longer  run  purposes  we 
ZyL  the  level  of  the  sea  itself  changing,  under  the  in- 
fluence of  the  tide,  and  may  have  a  dynamic  normal,  which 
is  still  to  be  distinguished  from  the  fluctuations  due  to  the 
play  of  winds  on  the  surface. 

We  have  further  an  increasing  recognition  of  the  up  and 
down  play  of  forces  accelerating  and  retarding  the  processes 
o?l^dustry  and  trade.  For  earlier  writers  panics  and 
:  iseTwere'anomalies;  since  Mill's  Principles  of  Economy 
o  go  back  no  further,  we  have  had  increasing  recognit^n 
of  Lh  occurrences  as  more  or  less  periodic  and  mevitable, 

'  Principles  of  Economics,  passim. 


THE   RECONCILIATION   OF   >  :'ATICS  AND   DYNAMICS      $49 

bound  up  in  the  very  nature  of  economic  life  itself,  and  of 
late  there  has  been  a  fairly  general  acceptance  of  the  notion 
of  the  business  cycle,  of  an  alternating  rhythm  of  prosperity 
and  depression.  The  explanation  of  this  alternation  has 
been  attempted  by  numerous  theories,  one  of  which,  that 
of  Joseph  Schumpeter,'  rests  the  whole  case  definitely  in 
the  distinction  between  static  and  dynamic  tendencies,  and 
in  the  conflict  between  the  opposing  sets  of  forces  which 
statics  and  dynamics  undertake  to  describe. 

We  are  told  by  the  ortho<lox  economist  that  war  is 
wasteful,  destroying  laborers  and  goods,  and  lessening  the 
wealth  and  productive  power  of  society.    We  are  told  that 
it  diverts  labor  from  productive  emplo>'ments,  that  it  turns 
huge  masses  of  capital  and  labor  to  the  production  of  goods 
which  men  cannot  enjoy,  that  it  burdens  the  people  with 
taxes,  etc.     Static  theory  can  see  nothing  but  evil  in  war, 
from  the  standpoint  of  minimizing  human  sacrifices,  and 
maximizing  human  enjoyments.    None  the  less  we  see 
many  war  periods— notably  that  of  our  Spanish-American 
War,  and  the  present  World  War,  so  far  as  the  United 
States  arc  concerned— periods  of  marked  prosperity,  grow- 
ing out  of  the  new*  expenditures  which  war  itself  involves. 
Mules  and  other  farm  products  rose  in  price  with  the 
Spanish-American  War,  as  the  Federal  Government  bought 
them  for  the  army;  various  factories  concerned  particularly 
with  war  munitions  increased  their  activity,  the  gains  of 
factory  owners  and  farmers  led  them  to  increase  their 
purchases,  wages  rose,  and  rose  in  part  because  part  of  the 
labor  force  was  in  the  army.    The  Civil  War  did  spell 
demoralization  and  economic  ruin  for  the  South,  but  for 
the  North  it  gave  a  great  dynamic  impetus  to  trade,  trans- 
portation and  industry— an  impetus,   strangely  enough, 
that  was  so  great  that  the  new  industries  and  enterprises 

'  Tkcork  dcr  icirlsrliaftlichai  Eiiiwkklung. 


ill 


ii 


if)! 


pi! 

liL 


S50 


THE   VALUE   OF   MONEY 


which  had  grown  up  were  able  to  absorb  with  little  shock 
the  million  men  set  free  from  the  Northern  armies  when  the 
creat  struggle  was  over.* 

For  static  theory,  scarcity  is  an  evil.    A  general  over- 
production is  impossible.     For  the  practical  busmess  man, 
confronted  with  the  momentous  problem  of  marketmg  his 
output,  overproduction  is  a  vital  reality,  and  there  are  few 
times  indeed  when  much  more  could  not  be  produced  if 
only  a  satisfactory  market  could  be  found  for  it.    Static 
theory  would  see  the  whole  explanation  of  this  m  malad- 
justment, too  much  of  some  things  being  produced,  too 
little  of  others.    This  simple  statement  does  explam  much 
of  the  phenomenon,  but  it  is  far  from  telling  the  whole 
story  and  even  if  it  were  a  complete  explanation,  it  would 
by  no  means  dispose  of  the  reality  of  overproduction  as  a 
constant  menace,  even  when  not  a  dire  reality,  facing  abnost 
every  business  man.    Static  theory  at  best  teUs  what  a 
completed  adjustment  would  be;  it  does  not  touch  the 
problem  of  how  adjustment  is  brought  about,  and  malad- 
justment overcome.    Yet  just  that  problem  is  the  vital 
concern  of  the  business  man. 

For  static  theory,  high  or  low  prices  are  matters  of  no 
concern.  And  abundance  or  scarcity  of  money  and  credit 
make  no  real  difference  in  the  economic  process.  Abundant 
money  and  cretlit  exhaust  themselves  in  raising  prices,  and 
the  rest  of  economic  Ufe  goes  on  unchanged.  This  doctrine 
of  the  quantity  theory  is,  as  I  have  undertaken  to  show  m 
Part  II  bad  even  as  a  matter  of  static  theory.  But  it  is 
only  as  a  matter  of  static  theory  that  it  is  even  thinkable. 
The  economic  theorv  of  the  19th  Century,  following  the 
lead  of  Adam  Smith  and  Ricardo,  has  been  accustomed  to 

■•  T'lL-  writer  ha«  ventured  some  tentative  predictions  as  to  conditions 
following  the  present  War  in  the  New  York  Times  Sunday  magazine  of 
Dec.  10,  IQ16,  pp.  lo-ii. 


THE   RECONCILIATION   OF   STATICS  AND   DYNAMICS      55 1 

dismiss  as  utter  folly  the  notions  of  the  Mercantilists  as  to 
the  balance  of  trade,  and  the  importance  of  an  inflow  of 
gold,  and  has  conclusively  proved  that  protective  tariffs 
tend  to  divert  the  labor,  capital  and  land  of  a  country-  from 
those  lines  of  production  they  are  best  adapted  to  to  lines 
for  which  they  are  less  well  suited.    Critics  have  pointed 
out,  as  in  the  "infant  industries"  argument,  that  we  can- 
not treat  the  labor  capacity  and  technical  knowledge  of  a 
country  as  constants,  that  the  temporary  encouragement 
of  one  line  of  industry  by  a  tariff  may  so  modify  the  data 
of  the  situation  that  the  country  may  in  time  become  better 
adapted  to  the  protected  industry  than  to  other  lines.    And 
I  think  that  we  may  well  go  further,  and  make  substantial 
concessions  to  the  doctrines  of  the  Mercantilists  as  they 
themselves  stated  them,  seeing  in  a  favorable  balance  of 
trade,  and  in  expanding  exports  and  diminishing  imports 
sources  of  impetus  which  are  not  subsequently  neutralized 
by  the  static  process  of  equilibration.    I  do  not  conclude 
from  this  that  protective  tariffs  are  commendable,  any 
more  than  I  conclude  that  war  is  commendable.    Both 
may  give  dynamic  impetus,  and  lead  to  economic  develop- 
ment.   Both  may  lead  to  political  corruption,  to  iniquities 
in  the  distribution  of  wealth,  to  waste  and  suffering  of 
various  kinds,  in  which  honest  and  patriotic  men  suffer, 
and  cunning  and  unworthy  men  gain.    The  point  here  is 
simply  that  static  theory  does  not  tell  the  whole  stor>'  re- 
garding either  tariffs  or  wars.    It  may  well  be  true-  I 
think  it  is  true— that  static  theory  offers  the  more  important 
principles  for  judging  the  results  of  wars  and  tariffs. '     It 

'There  are  important  dynamic  and  "frictional"  considerations  opposed 
to  protective  tariffs,  as  well  as  static  considerations.  Very  many  of  the 
"intangibles"  later  to  be  discussed  depend  on  'ree  trade.  A  high  percentage 
of  p:ncland's  "capital"  would  be  destroyed  by  protective  tariffs  and  trade 
restrictions,  and  to  a  less  degree  this  is  true  of  all  countries.  Vjdc  N.  i. 
Time':  Sunday  magazine,  Dec.  10,  1916,  pp.  lo-ii. 


552 


TllK    VAl.Li;   OF    MONKY 


ihU 


If 


*: 


;»■■:■■ 


i 


is  the  central  problem  which  I  ha\  c  set  myself  ul  the  outset 
of  this  discussion  to  fmd  ii  way  to  brin^'  static  and  dynamic 
considerations  under  n  common  measure,  to  reduce  them  to 
homogeneity  so  that  comparisons  may  be  institu-ted,  and 
so  that  the  student  of  statics  and  the  student  of  dynamics 
need  not  talk  merely  at  cross-purposes.  But  we  do  not 
achieve  this  result  by  ignoring  considerations  in  either 

sphere. 

Bastiat,  with  a  fme  show  of  logic,  has  sought  to  rule  out 
of  court  the  doctrines  that  extravagance  and  tarifTs,  etc., 
are  sources  of  prosperity  by  his  emphasis  on  the  "  Unseen," 
as  opposed  to  the  "Seen."  The  prosperity  growing  out  of 
the  extravagant  expenditures  of  one  brother  is  open  to  all 
eyes.  The  consequences  of  the  savings  of  the  frugal  brother 
men  do  not  see  so  easily,  and  do  not  attribute  to  his  fru- 
gality. Doubtless  Bastiat  is  right  in  his  main  theses.  But 
one  point  needs  emphasis:  that  which  is  "Seen"  stirs  the 
imagination  of  men.  And  imagination  energizes  human 
activity.  The  motivation  of  economic  life  is  a  psycholog- 
ical matter. 

And  so  at  a  host  of  points  the  contrast  may  be  drawn,  in 
one  or  another  form.  The  pure,  abstract,  static  theory 
gives  one  conclusion;  the  other  approach  suggests  one 
different.' 

How  is  it  possible  to  give  proper  weight  to  considerations 
drawn  from  such  divergent  spheres  of  thought?  Indeed,  how 

•  .\  case  in  jwint  is  the  discussion  of  the  clTccls  of  increment  taxes  on  the 
building  trade,  participated  in  b>  Professor  R.  M.  Haifi  and  the  present 
writer  in  the  Quarlcrlv  Jounuil  of  Eamomks,  Aug.  1Q14,  and  Aug.  1915. 
The  doctrines  criticised  in  my  article  were  static  theories,  and  my  criticisms 
made  the  static  assumptions.  Professor  Ilaij,'.  accepting  the  validity  of 
my  criticisms  on  the  assumptions  laid  down,  for  the  most  part,  seeks  to 
recast  the  argument  on  a  dynamic  basis,  emphasizing  dynamic  and  "fric- 
tional"  considerations.from  which  my  argument  had  abstracted.  I  think 
that  what  dilTerence  of  opinion  remains  between  us  would  probably  be 
removed  if  the  distinction  between  static  and  <lynamic  were  clearly  drawn 
and  rigidly  adhered  to. 


THE    UK(ON(II.IATI()N   OF   STATUS  AND   DYNAMICS      55.^ 

shall  we  wt-iKh  the  dynamic  considerations  at  all?    Static 
theory   presents    itself    in    (luasi-matheniatical    form.     At 
times,  it  i)ara(les  itself  in  etiuations,  and  it  readily  enough, 
without  arousing  a  feeling  of  incongruity,  expresses  itself 
in   mathematical    curves,    with   ordinates   and    abscissae. 
One  static  tendency  finds  itself  in  marginal  equilibrium 
with  another,  and  the  margin  is  expressed  in  quantitative 
units,  commonly  sums  of  money     Static  doctrine  doe    in- 
deed, lay  claim  to  precision  and  exactness,  and  static  tend- 
encies may  be  weighed  against  one  another.     But  how 
shall  one  undertake  to  give  quantitative  measure  to  such 
a  thing  as  the  educational  influence  of  a  tariff  on  silk  manu- 
facture?   How  measure  the  dynamic  impetus  of  a  new 
chain  of  banks  on  the  industry  and  trade  of  the  region 
affected?    How  gauge  the  importance  of  a  new  adver- 
tising scheme,  or  a  new  invention?    Dynamic  considera- 
tions arc  commonly  presented  in  vaguer,  looser  form  than 
static  theories.    Usually  we  have  merely  a  statement  of  a 
qualitative  tendency,  without  effort  to  make  the  importance 
of  the  tendency  quantitative.     Indeed,  I  think  it  safe  to 
say  that  one  chief  difference  between  statics  and  dynamics 
is  that  those  tendencies  which  can  be  most  easily  formu- 
lated have  been  recognized  by  statics,  while  those  which  are 
less  understood,  and  less  precisely  formulated,  are  left  to 
dynamics!    A  big  part  of  the  difference  is  methodological, 
rather  than  inherent  in  the  nature  of  the  phenomena  them- 
selves. 

I  think  that  it  needs  little  argument  to  show  that  all  the 
contrasts  listed  at  the  beginning  of  this  chapter  do  not  run 
on  all  fours  Compare,  let  us  say.  the  contrast  between 
"statics  and  d>Tiamics"  with  that  between  "historical  and 
cross-section"  study.  Concrete,  realistic  history  is  not 
dynamic  theory.  A  realistic  description  of  >uciety  viewed 
at  a  given  short  peri(xl  of  time  is  not  static  theory.     Both 


lit 


V  '  I 


m 


554 


THE  VALUE  OF  MONEY 


Statics  and  dynamics  are  abstract.    Lau's  arc  not  the  same 
thing  as  description   and   narration.    The   assertions  of 
both  statics  and  dynamics  are  commonly  made  on  the 
assumption,  "ccelcris  paribus."    A  new  bank  will  stimulate 
business  in  a  western  town  if  bank-robberies  do  not  come 
into  fashion!    A  tariff  on  wool  will  lend  to  educate  the 
farmers  in  sheep-raising  if  the  habit  of  relying  on  govern- 
mental assistance  does  not  develop,  and  make  them  more, 
rather  than  less,  inert,-  or  sharpen  their  political  rather 
than  their  economic  acumen.    Concrete  histor>'  need  not 
always  verify  dynamic  laws!  •    It  is,  above  all,  important 
to  insist  that  the  distinction  between  statics  and  dynamics 
is  not  the  same  as  the  distinction  between  theory  and 
description,  or  between  the  abstract  and  the  concrete. 
Evolutionary  study  may  result  either  in  concrete  history, 
or  generalized  laws;  cross-section  study  may  be  either  con- 
crete description  or  abstract  formulae  concerning  forces 
in  equilibrium.    And  there  may  be  var>'mg  degrees  of 
abstractness  in  both  cases. 

The  contrast  between  long-run  and  short-run  tendencies 
is  not  necessarily  the  same  as  that  between  statics  and 
d>Tiamics.  This  former  distinction  does  recognize  one 
factor  which  is  sometimes  classed  as  "dynamic,"  namely, 
"friction."— "Friction,"  by  the  way,  is  a  blanket  term 
which  covers  a  multitude  of  sins  of  imperfect  analysis  and 
lazy  thinking!  It  is  far  from  a  simple,  unitary  thing. 
Sometimes  it  seems  to  mean  the  action  of  the  whole  social 
order,  other  than  the  economic  values!— But  d>Tiamic,  as 
used  by  the  two  writers  who  have  used  the  term  most  pre- 
cisely, J.  B.  Clark  -  and  J.  Schumpeter.^  is  reserved  for 
those  factors  in  economic  life  which  make  for  constructive 

iQ-   j„y  review-.irticle,  "  Schumpeter's  n\Tiamic  Economics,"  Pol.  Set. 

Quart.,  Dec.  iqis,  p.  645. 
2  Distrihiition  of  Wealth;  fissctitiah  of  Econcmk  Theory. 
«  Thcorie  dcr  icirtschaftlichoi  Eiitii.ickluiig. 


THE   RECONCILIATION  OF  STATICS  AND  DYNAMICS      555 

change.    Neither  writer  would  call  mere  habit  and  inertia, 
which  make  readjustments  slow,  or  the  necessities  of  phys- 
ical nature,   which  retard   readjustment,   by  the  name, 
"dynamic."    It  may  be  noted,  in  p-  wing,  that  both  writers 
limit  the  term  quite  strictly  to  changes  in  economic  life 
growing  out  of '  economic  causes:  Schumpeter  narrows  the 
dynamic  factors  to  one,  namely,  enterprise,  while  Clark 
gives  five  general  classes  of  dynamic  factors,  all  of  which 
are  primarily  economic  in  character.    Neither  extends  his 
study  to  cover  forces  which  are  not  primarily  economic  in 
character,  but  which  none  the  less  lead  to  economic  changes. 
Again,  the  "theory  of  prosperity"  is  not  identical  with 
"economic  dynamics,"  though  the  two  in  large  measure 
overlap.    For  one  thing,  while  some  writers,  as  Schumpeter, 
find  the  business  cycle  to  be  a  necessary  consequence  of 
dynamic  changes,  and  would  maintain  that  no  business 
cycle,  no  up  and  down  of  tempo  in  production,  no  panics 
or  crises,  are  necessary  if  changed  methods  of  industry,  etc., 
did  not  come  in,  not  all  writers  would  so  explain  the  business 
.    Some  writers  would  fina  the  explanation  in  the 
in.  ;rent  instability  of  a  money  and  credit  economy,  some 
in  the  inherent  weakness  of  a  capitalistic  system,  quite 
apart   from   necessary   dynamic   change.    Irving   visher 
makes  no  use  of  (  hanged  methods  of  production  in  his  ex- 
planation of  business  cycles,  though  he  does  mention  in- 
vention as  one  possible  cause  of  a  disturbance  in  normal 
equilibrium.'^    But  further,  dynamics  is  largely  concerned 
with  problems,  like  invention,  changes  in  the  economic 
habits  of  a  people,  methods  of  organizing  industry,  etc., 
which,  while  they  may  well  bear  on  the  problems  of  pros- 
perity and  depression,  yet  have  interest  for  their  own  sake, 
and  would  be  studied  if  there  were  no  business  cycles. 

•  Cf.  my  Social  Value,  pp.  139-140,  n. 
2  Purchasing  Power  of  Money,  ch.  4. 


^ll 


m 


SS6 


THK  VAU'K  OK   MoNKY 


Further,  the  notion  of  stutirs.  the  other  tt-mi  in  the  stiitic- 
(lynamit  contrast,  is  m)t  identical  with  the  "theory  »)f 
wealth,"  or  "theory  of  r.xxIs."  or  "theory  of  the  wealth  of 
nations"  which  such  a  writer  as  Vehlen  '  would  put  in 
contrast  with  his  "theory  of  prosperity."  There  is  a 
normative,  or  practical,  and  polemical  coloring  in  the  b(Mly 
of  doctrine  growing  out  of  Adam  Smith,  which  Vehlen 
would  term,  the  "theory  of  the  wealth  of  nations."  which 
is  lacking  in  the  more  colorless  "statics"  of  to-<lay. 

I  do  not  find  any  of  the  contrasts  thus  far  discussed  quite 
satisfactory.  I  have  been  using  the  terms,  statics  and 
dynamics,  as  general  terms  to  cover  all  these  contrasts. 
I  shall  try  to  formulate  a  general  contrast  which  includes 
most  of  the  ideas  passed  in  review,  from  a  somewhat  ditTer- 
cnt  angle,  and  then  try  to  show  that  the  contrast,  while 
useful,  is  not  absolute,  and  that  it  is  possible  to  measure 
considerations  drawn  from  one  viewpiint  in  rms  of 
considerations  drawn  from  the  other. 

Let  us  take  as  our  starting  point  the  notion  of  a  cross- 
section  picture  of  society.     I  have  set  forth  this  notion  in 
ch.  13  of  my  Social  Value,  and  have  elaborated  it  in  the 
discussion  of  von  Mises'  theory  in  the  chapter  on  "Mar- 
ginal Utility"  in  this  book.    A  cross-section  picture  may 
be  made  more  or  less  concrete  and  descriptive,  or  abstract 
and  analytical.     If  one  looks  at  the  picture  of  society  in 
cross-section  as  given  by  Giddings  in  his  Principles  of  So- 
ciology (Bk.  II,  chapters  on  "The  Social  Population,"  "The 
Social  Mind,"  "The  Social  Composition,"  and  "The  Social 
Constitution"),  one  finds  a  picture  in  which  organization 
and  system  are  made  clear,  but  in  which  vivid  descrijition 
of  concrete  social  facts  is  the  primary  concern.     The  ac- 
count given  is  largely  qualitative  rather  than  quantitative. 
It  is  a  picture  of  flesh  and  blood,  as  well  as  an  account  of 

'  Theory  of  Business  Lnkrprisc. 


TIIK    KK(<>N<UJArH>N   OK   STATICS  ANU  DYNAMK  S      557 

functioning.     It  is,  iwrhaps.  not  easy  to  realize  that  Gid- 
(linRs  is  (loinj?  the  same  Kcneral  sort  of  thing  that  the  pure 
economic  theorist  is  doing,  with  his  picture  of  a  static 
cquilil)rium    of    economic    values.    But    what    economic 
theory  is  concerned  with  is.  after  all,  to  be  found  in  Gid- 
dings'  scheme.     The  pure  theorist  takes  for  granted  the 
physiographic    environment,    whose    influence    Giddings 
takes  into  account.    The  theorist  abstracts  from  biological 
and  racial  factors.    He  assumes  a  social  population,  a 
social  order,  a  political  system.     He  has  not  taken  into  his 
purview  the  social  mind  as  a  whole,  in  his  static  theory. 
Rather,  he  has  been  concerned  with  only  one  part  of  the 
social    mind,    namely,    the    economic    values.     Economic 
values,  and  the  objects  of  economic  value,  have  been  the 
data  of   the   static   theorist.     Given   scales  of  economic 
value,  such  that  for  one  quantity  of  goods  of  a  given  kind, 
a  given  value  per  unit  will  obtain,  given  all  of  these  value- 
scales,  and  given  the  quantities  of  gootls  and  services  whose 
values  arc  in  question,  and  static  theory  will  furnish  an 
equilibrium  picture,  in  which  the  price  relations  of  different 
kinds  of  goods  are  made  clear,  and  their  values  are  meas- 
ured.    The  value-scales,  and  the  absolute  magnitude.',  of 
value  at  different  points  on  the  scale,  are  assumed,  are 
data.    Further,  in  order  that  the  notions  may  be  made 
mathematically  precise,  a  unit  of  value  is  needed,  and  this 
is  commonly  the  value  of  the  money-unit,  which  is  assumed 
to  be  constant.    The  picture  then  becomes  systematic. 
There  is  a  system  of  values,  expressed  in  prices,  which  is 
stable,  so  long  as  the  data  do  not  change.     It  is  mechanic- 
ally conceived,  and  illustrated  by  various  mechanical  sym- 
bols, as  balls  in  a  bow!,  or  connecting  reservoirs,  or.  best  of 
all.  by  intersecting  curves.     It  is  an  abstraction  from  the 
living,  pulsing,  organic  whole  of  the  social  mind— the  in- 
termental  life  of  men  in  society.    It  squeezes  much  of  the 


iU' 


#B'f  • 


11 


558  THE   VALUK   OF    MONEY 

life  out  of  the  phenomena  it  describes.  It  makes  them 
exact,  only  by  making  them  mechanical.  It  thus  becomes 
exact  by  becoming,  in  considerable  degree,  superficial  and 
abstract.'  This  is  not  to  condemn  static  theory.  Static 
theory  has  proved  its  usefulness  by  solving  too  many  prob- 
lems for  such  a  statement  of  its  limitations  to  involve  a 
condemnation.  But  the  statement  of  its  limitations  will 
aid  us  in  seeing  its  relation  to  that  vaguer  body  of  doctrine 
which  we  call  dynamics,  or  the  theory  of  prosperity,  etc. 

Now  this  means  that  static  theory  is  not  value  theory. 
It  assumes  a  theory  of  value.     It  assumes  the  value-scales 
as  data.     It  assumes  the  value  of  money  as  a  datum. 
Static  theories  of  supply  and  demand,  cost  of  production, 
capitalization,  etc.,   assume  the  value  of  money,  as  has 
been  shown  in  Part  I,  and  static  theory,  resting  in  the  notion 
of  accomphshed  transition,  normal  equilibrium,  abstracting 
from    the   difTiculties   of   readjustment,   abstracting   from 
friction,  etc.,  misses  the  whole  point  as  to  the  functions  of 
money,  as  shown  in  Part  II.    Static  theory  proceeds  by 
assuming  a  change  in  one  of  th-  elements  of  its  situation, 
say  one  of  the  value-scales,  and  then  tells  what  the  new 
equilibrium  will  be  after  readjustment  takes  place,  assuming 
that  other  value-scales  remain  constant,  and  that  quantities 
of  the  objects  of  value  do  not  change.     Or,  it  assumes  a 
change  in  the  quantity  of  one  of  the  objects  of  value,  and 
then  predicts  the  new  equilibrium.     The  new  equilibrium 
will  often  involve  changed  \alucs  and  prices  all  around,  and 
'.vill  often  involve  altered  quantitiesof  other  objectsof  value. 
But  the  initial  change  comes  from  an  alteration  from  out- 
side the  system  in  one  or  more  of  the  data  of  the  system. - 

'  Vide  my  discussion  of  Professor  I'attcn's  Knonslnirlion  of  Economic 
Theory  in  the  I'clilical  Sciciirc  Qii,irlirl\  of  M;ircii,  H)l^,  and  the  American 
Ecoiiomu  Rniiw,  Supi.kmcnt  to  the  M;irih  luuiibLr,  H;i j,  pp.  y-y-f^i- 

Hf.  Schumpeter,  loc.  (it.,  pp.  i-ioi,  and  passim.  That  the  quantity 
theory  is  essentially  "static"  will  appear  strikingly  if  the  statements  in 


;l 


, 


? 


THE   RECON'CIUATION   OF   STATICS  AND  DYNAMTCS      559 

Now  dynamics,  theo.y  of  prosperity,  etc.,  are  concerned 
with  the  causes  of  changes  in  the  data  with  which  statics 
works,  in  lartre  measure.     Among  the  prolilems  with  which 
statics  has  not  adequately  dealt,  and  in  large  measure  can- 
not deal,  are  (i)  the  nature  of  value  itself,  and  the  laws 
governing  changes  in  the  value-scales;  (2)  the  problems  of 
readjustment,  including  the  problems  of  money,  credit  and 
exchange;  (3)  the  psychology  of  invention,  of  enterprise, 
and  the  like.     (4)  The  reactions  of  economic  values  and 
economic   organization   on   the   non-economic   phases   of 
social  life.     (5^  The  reaciion  of  the  non-economic  factors, 
as  law,  moral>.  art,  religion,  etc.,  on  economic  life.     (6)  The 
problem  of  prosperity  and  depression.     I  say  that  statics 
has  not  dealt  adequately  with  these  problems.    Statics 
in  its  present  narrow  form  cannot  deal  with  them.     But 
in  considerable  degree,  I  am  convinced,  statics  can  be  made 
to  deal  more  adequately  with  them,  if  its  scope  be  broad- 
ened, and  its  limitations  be  made  less  rigid.    Schematic- 
ally, at  least,  the  central  ideas  of  statics  can  be  applied  to  a 
large  part  of  these  problems.     I  may  add  that  my  list  of 
six  classes  of  problems  with  which  statics  has  not  ade- 
quately dealt  is  not  meant  as  a  system  of  categories.    The 
list  is  incomplete,  and  the  classes  are  not  mutually  ex- 
clusive.    Rather,   they  overlap  in  large  measure.     In  a 
large  way,  it  might  be  said  that  statics  is  concerned  with 
the  laws  of  the  equilibration  of  values,  and  that  dynamics, 
theory  of  prosperity,  etc.,  are  concerned  with  the  nature  and 
causes  of  variations  in  the  values  themselves.    The  con- 
trast may  be  put,  in  general,  as  the  contrast  between  the 
theory  of  value,  and  the  Ihcory  of  price,  statics  being  price- 
theory,  and  d}Tiamics  being  value-theory.     But  this  is  a 
thesis  which  calls  for  much  elaboration  and  qualification 

the  text  he  compared  with  iMshers  (iiscussio.i  ia  ch=.  5-/  uf  The  riirdiasing 
Pourr  of  Money. 


'it 
j'h'i 


II 


ll- 


m 


560 


THE   VALUE  OF   MONEY 


before  its  signilkance  is  made  clear,  to  say  nothing  of  its 
justilication  Ining  established. 

We  may  approach  the  problem  of  bringing  the  two  terms 
of  the  contrast  together  from  either  of  two  angles:  (i)  we 
may  show  that  dynamic  factors  tend,  in  large  degree,  to 
submit  themselves  to  measurement  m  terms  of  money- 
prices,  which  obey  the  laws  of  static  marginal  equilibrium. 
(2)  We  may  show  that  all  static  prices  presuppose  values 
whose  explanation  is  in  terms  of  the  same  phenomena  with 
which  d>-namics,  the  theory  of  prosperity,  etc.,  have  busied 
themselves,  namely,  considerations  drawn  from  the  study 
of  social  psvchology,  including  the  psychology  of  sugges- 
tion, imitation,  mob-mind,  the  functional  organization  of 
minds  into  a  social  mind,  social  beliefs,  social  values  of 
other  than  economic  nature,  and  social  institutions,   (i)  The 
evidence  on  the  first  point  is  already  in  considerable  meas- 
ure worked  out,  particularly  by  Veblen.  in  his  Theory  of 
Bush    ss  Enterprise,  and  in  his  other  writings  on  the  nature 
of  capital,  etc.     Something  more  in  this  direction  I  have 
done  in  my  Social  Value,  and  other  writers  have  elab- 
orated the  notion.    (2)  The  case  for  the  second  contention 
has  been  made  in  detail  in  my  Social  Value,  and  in  what 
follows  I  shall  rely  chiefly  on  the  discussion  presented  there, 
and  in  the  chapter  on  "Value"  in  this  book. 

I  take  up  first  the  thesis  that  d>Tiamic  factors  may  come 
under  the  static  measure,  ''eblen  has  made  much  of  the 
contention  that  modern  "capital"  is  not,  as  Smith  thought, 
and  as  orthodox  economists  in  general  have  contended,  a 
matter  of  physical  accumulations  of  goods.  The  volume  of 
business  capital  is  a  pecuniar\'  concept,  and  may  wax  and 
wane  with  little  variation  in  the  physical  stocks.  "  Under 
modern  conditions  the  magnitude  of  the  business  capital 
and  its  mutations  from  day  to  day  are  in  great  measure  a 


THi;    RECONCILIATION   OF   STATICS   AND   DYNAMICS 


^01 


question  of  folk  psychology  rather  than  of  material  fact. 
{Theory  of  Business  Enterprise,   p.    i49-)    And  in  large 
measure  Veblen's  work  is  given  to  showing  how  factors  of 
legal  and  social  psychological  nature  get  a  money-measure. 
The  actual  capital  of  a  business  enterprise  does  not  rest 
chiefly  on  the  physical  equipment,  stocks  of  raw  materials, 
etc     -tc    which  it  possesses.     To  be  added  is  "good  will, 
and  this  includes  (p.  139)  established  customary  business 
relations,  reputation  for  fair  dealing,  franchises,  privileges, 
trade-marks,  brands,  patent  rights,  copyrights,^  exclusive 
use  of  processes  guarded  by  law  or  secrecy,  exclusive  control 
of  particular  sources  of  materials,  etc.    Veblen  contrasts 
things  of  this  nature  sharjily  with  the  concrete  equipment, 
saving  that  the  former  arc  serviceable  only  to  the  owners, 
while  the  latter  are  serviceable  to  the  community  at  large 
as  well  The  physical,  tangible,  and  ethically  commendable 
character  of  the  physical  equipment  is  everywhere  stressed 
whil^  the  pathological,  anomolous,  and  sinister  character  of 
the  less  tangible  and  more  recent  "capital  items"  is  always 
set  before  us-all  the  more  efTectively  because  Veblen  main- 
tains a  satirical  attitude  of  moral  indifference,  and  presents 
the  case  with  01>-mpiau  aloofness.     I  am  not  here  concerned 
with  the  social  welfare  aspect  of  the  matter,  though  I  shall 
later  speak  of  that.    My  present  purpose  is  to  make  clear 
two  points  in  Veblen's  doctrine:  (i)  that  he  does  bring  these 
intangible  things,  which  are  the  variables  involved  m  his 
theory  of  prosperity,  under  the  price  measure;  and  (2   that 
he  considers  these  prices  as  anomalies  from  the  standpoint 
of  the  general  laws  governing  the  values  and  prices  of  con- 
crete goods.    To  this  last  point  I  shall  later  take  sharp 
exception.     For  the  present.  I  wish  to  develop  further  the 
extent  to  which  such  factors  may  be  brought  under  the 
"eneral  static  measure. 
"^   The  feature  of  static  theory  which  Veblen  chiefly  cm- 


r    1' 


11 


rlWSt- 


1^ 


56: 


Tin:   VALUE  OF   MONEY 


ploys  in  givinR  a  money-measure  to  his  "intangible  capital" 
is  the  capitalization  theory. ^  The  capital  magnitude  of  the 
items  of  good  will  previously  mentioned  is  a  capitalization 
of  the  income  which  they  arc  expected  to  bring  in.  And  it 
may  be  said  that  a  large  part  of  Veblen's  doctrine  of  the 

•  It  is  only  as  u  matter  of  hiKlily  al)stract  statics  that  the  capitalization 
theory  (as  presented  in  earlier  thaiiters)  tan  be  maintained  with  any  strict- 
ness In  fact,  ca|  ital  \alucs  are  not  always  pas>ive  shadows,  yielding  freely 
to  ihanRcs  in  antici[.ated  income,  and  to  chan^'es  in  the  rate  of  discount. 
Very  often  capital  values  become  themselves  sul)stantial,  become  divorced 
from  their  presuppositions,  can  no  longer  be  explained  by  any  imp'  tation 
iiroccss.  This  is  particularly  likely  to  be  the  case  with  lands  in  inactive 
markets.  The  income-bearer  is  as  much  an  object  of  %  alue  as  is  the  income; 
is  often  immcdiatdx',  for  its  own  sike,  an  object  of  value.  The  Ions-run 
teii.Iency  to  assimilate  this  value  to  a  cai)italizali<)n  of  prospective  incomes 
may  be  exceedingly  slow  in  workinj,'  out,  if  it  ever  works  out.  Indeed,  a 
high  caiiital  value  m.ay  sometimes  Ijc  a  means  of  increasing  the  income, 
since  in  the  minds  both  of  lessor  and  lessee  the  usual  percentage  return  on 
capital  will  be  a  factor  in  determining  what  is  a  "projier"  rental.  If  a  capi- 
tal value,  no  long'  ■■'stified  bv  pros[)ective  income,  has  bchiml  it  the  s;inc- 
t'ion  of  actual  cost ->  -...lav,  there  may  easily  be  a  rellex  from  it  on  the  size 
of  the  income  itseU.  Such  a  capital  value,  unjustified  by  prospective  in- 
come, but  still  believed  in  by  the  market,  may  function  just  as  effectively 
as  any  other  capital  value.  Book-values,  not  marked  down  to  corres|K)nd 
with  changed  income-prospects,  even  when  they  cannot  command  i>ur- 
chasers,  may  still  serve  as  a  Ixisis  for  /ojwi— Veblen's  theory  of  crises  rests, 
as  we  shall  see,  in  i)art  on  this  fact.  _ 

Considerations  of  this  sort  strengthen  still  further  the  case  against  the 
marginal  utilitv  theory  of  value.  To  pass,— as  Fetter  and  the  Austrians 
in  general  seek  to  do— from  marginal  individual  consumption  values  to 
market  prices  of  consumption  goods,  then  to  prices  of  production  goods, 
or  to  magnitudes  of  distributive  shares,  then,  simply,  bx'  the  capitalization 
theory,  to  capital  values,  with  the  notion  that  the  original  marginal  utilities 
sui)prv  the  psychological  explanation  at  every  stage  of  the  process,  the  re- 
moter values  being  merely  br.ilt  up  of  the  original  marginal  utilities,  is 
quite  invalid.  .Vt  every  stage  there  is  a  hitch:  the  marginal  utilities  do  not 
explain  the  prices  or  values  oi  the  consumption  goods,  as  has  already  been 
elaboratelv  pointed  out;  and  the  relation  between  the  values  of  consumj)- 
tion  goods  and  the  capital  values  is  very  much  looser  and  less  direct  than 
the  static  theory  requires.  Institutional,  legal,  and  moral  forces  come  in, 
not  alone  at  the  first  step,  in  giving  social  weight  to  the  wants  of  special 
classes  and  indi\iduals.  but  also  at  the  second,  giving  |)restige  to  certain 
enterprises,  and  so  higher  values  to  their  securities,  giving  banking  supiwrt 
licie  and  refusing  it  tliere,  giving  popular  and  p.iiii..iic  support  here,  and 
not  there,  giving  direct  action  of  law,  custom  and  tradition  on  certain  prices 
(whence,  indirectly  on  values),  and  leaving  prices  free  to  change  readily  in 


THE   RECONCILIATION  OF   STATICS  AND  DYNAMICS      563 


causes  of  the  ups  and  dowTis  of  business  rests  on  the  com- 
plaint that  this  capitalization  process  is  not  rationally- 
carried  through— that  incomes  are  overestimated,  and  that 
business  men  are  tenacious  of  capital  magnitudes  once  built 
up,  and  refuse  to  mark  them  down  properly  when  the  facts 
in  the  situation  have  changed.  His  theory  of  prosperity 
thus  rests  on  non-rational  enthusiasm  on  the  one  hand,  and 
a  certain  kind  of  "friction"  on  the  other  hand,  and  appar- 
ently the  difficulties  in  the  situation  as  he  sees  it  would 
largely  disappear  if  these  two  elements  could  be  rational- 
ized, and  the  static  theory  work  more  perfectly.  The  ele- 
ments involved  in  the  capitalization  theory,  as  shown  in 
the  chapter  on  that  topic,  are  three:  the  anticipated  income, 
the  prevailing  rate  of  discount,  and  tlie  capital  value,  the 
last  named  being  the  child  of  the  first  two.  The  capital 
magnitude  is  a  shadow,  where  the  income  is  the  substance. 
Veblen  seems  to  find  the  trouble  arising  in  that  the  capital 
magnitude  takes  on  a  substantial  character,  and  refuses 
to  play  the  passive  role  of  shadow.  It  is  interesting,  in 
passing,  to  compare  this  theor\'  of  Veblen's  with  the  theory 
of  crises  developed  by  Irving  Fisher,  from  the  standpoint 
of  a  body  of  doctrine  which  is  purely  static,  and  which 
Veblen  has  criticised  as  "taxonomic"  in  a  high  degree. 
For  Fisher  '  the  trouljic  arises  from  friction  in  connection 
with  another  element  in  the  capitalization  problem,  namely, 
the  interest  rate.     Business  men  think  that  "a  dollar's  a 

other  cases.  (Cf.  my  discussion  in  Quart.  Jour,  of  Kronomics,  .\ug.  1915, 
pp.  6Qg-7oi.)  Tlie  sUitic  theory  of  capitalization  describes  an  ideal  logical 
relation,  while  capital  \aliies  are,  in  fact,  built  up  by  a  psychological  process 
which  is  logical  only  in  i>art.  In  large  degree,  especially  when  the  market 
lacks  perfect  fluidity,  capital  values  are  immediate,  and  not  merely  derived, 
values.  In  this,  I  think,  I  am  in  accord  with  the  view  briefly  slated  by  A.  S. 
Johnson  in  his  recent  review  of  Bohm-Bawerk  {Am.  Econ.  Rrc,  March, 
igi4,  pp.  ii.s-iif)). 

'  Loe.  fit.,  ch.  l\.  Vide  Veblen's  discussion  of  Fisher  in  the  Pd.  Set. 
Quart,  (if  1903,  and  hi.s  dibcusiion  of  Clark  in  the  Quart.  Jc-ir.  of  Fron., 
Feb.  1908. 


i<l 


jl 


1    '5i 


5^4 


TiiK  vai.xm:  of  MONKY 


I' 


i2i; 


dollar."  and  refuse  to  let  the  interest  rate  be  markeil  up  in 
;uconhinc','  with   the  doctrine  of   "appreciation   and   in- 
ti-rest."     This,  likewise,  leads  to  overcai)italization.  leaves 
the  passive  shadow  too  biy.     I  must  confess  that  it  seems 
to  me  that  one  theory  is  about  as  "taxonomic"  as  the 
other  -  that  both  rest  on  pointing  out  divergences  from  a 
static,  "taxonomic"  norm.     In  general,  Veblen's  work  in 
ihis  fiekl  consists  in  assimilating  the  "intangible"  capital 
to  the  class  of  lantl,  and  other  long  time  concrete  income- 
bearers,  but  that  is  after  all  classification,  systematization, 
"tiixonomy."    In  saying  all  this,  I  am  as  far  as  possible 
from  questioning  the  value  of  Veblen's  work.     Rather  I 
rate  it  as  of  extreme  significance.     "Taxonomy"  does  not 
aijpear  to  me  so  dreadful  a  word  as  it  does  to  Veblen.     I 
should  rather  say  that  some  taxt)nomy  is  good  and  some  is 
bad,  depending  on  whether  or  not  it  leads  to  fruitful  gen- 
eralizations, and  deeper  insights. 

It  is,  as  I  have  said,  chiefly  the  capitalization  theory 
which  Veblen  applies  to  these  newly  hnportant  intangible 
"capital-items."  The  phenomena  of  the  stock-market, 
where  such  things  are  most  actively  bought  and  sold,  and 
where  they  appear  as  differential  portions  of  the  capital 
values  of  securities,  doubtless  first  called  attention  to  them 
—though  the  item  of  "good  will"  as  a  busmess  asset,  for 
which  a  money-price  is  paid  when  businesses  change  hands, 
is  doubtless  older  and  wider  than  modern  cori)oration 
finance.  The  capitalization  theory  applies  to  them  most 
readily  and  obviously,  as  compared  with  other  elements  in 
the  static  theory  of  prices. 

But  as  we  become  better  used  to  the  large  role  which 
these  phenomena  play,— not  that  the  phenomena  are  new, 
but  that  their  present  importance  is  new,  and  hence  our 
serious  study  of  them  is  new  wc  are  increasingly  able  to 
see  that  other  elements  of  static  theory  also  apply.    Static 


THE    RF.CONCILIATIOX   OF   STATICS   AND   DYNAmCS      56;; 


theory  applies  increasingly  as  understanding  increases!  The 
vaguely  discerned,  the  novel,  the  miperfectly  analyzed, 
can  be  stated  only  in  qualitative  tenns.  As  things  are 
better  understood,  the  mind  seeks  system,  taxonomy, 
quantitative  measurement.  Business  men  to-day  are  well 
accustomed  to  applying  cost  concepts  to  many  of  these  in- 
tangible magnitudes.  Advertising,  for  example,  is  being 
worked  out  with  increasing  exactness,  and  business  men  are 
increasingly  applying  accounting  processes  to  the  deter- 
mination of  the  question  of  Atw  much  advertising  "pays." 
Well-known  brands  are  capital  items.  Well-known  brands 
have  cost  money!  Business  men  contemplating  tiid  mar- 
keting problem  may  well  balance  the  cost  of  creating  a 
new  brand  against  the  cost  of  buying  an  old  one,  and  may 
balance  the  cost  of  creating  a  new  brand  against  the  profit 
to  be  made  from  allowing  an  old  one  to  deteriorate,  through 
cheapening  its  process  of  manufacture.  Trade-connec- 
tions are  capital  items.  They  are  also  items  which  have 
been  created  by  patient  thought  and  labor  and  expense. 
Franchises,  since  the  days  when  the  public  awoke  to  their 
value,  have  cost  money  to  the  corporations  that  possess 
them,  and  figure  in  corporate  bookkeeping  often.  Even 
in  the  old  days,  they  often  had  a  cost,  which  commonly 
stayed  out  of  the  corporations'  books,  at  least  in  that  form, 
—bribes,  entertainments  to  legislators  and  members  of 
councils,  and  so  on.  In  Part  II  of  this  book,*  I  have  dis- 
cussed "selling  costs"  as  contrasted  with  costs  of  produc- 
tion in  the  narrow  sense,  and  have  pointed  out  how  high  a 
proportion  of  total  costs  these  selling  costs  are.  I  have 
also  indicated  how  many  of  these  costs  tend  to  be  "capi- 
talized." These  selling  costs  are  static  measures  of  the 
elements  of  "friction"  which  interfere  with  the  smooth 
working  of  static  laws!  An  extension  of  statics,  however, 
'  Chapter  on  "Volume  of  Money  and  Volume  of  Trade. " 


iiii 


566  THE   VALUE   OF   MONEY 

can  in  considerable  decree  take  account  of  them.  It  is,  of 
course,  far  from  true  that  cost  doctrine  will  explain  all  of 
these  intanRihle  capital  magnitude.-.  But  this  is  likewise 
true  of  the  prices  of  many  tangible  items.  Cost  doctrine 
does  not  hold  universal  swa>-  even  in  the  confmes  of  the 
strictest  static  theory. 

I  have  said  that  dynamic  factors  tend  to  come  under  the 
rules  of  static  taxonomy  to  the  extent  that  they  become 
more  accurately  understood.    The  un<Ierstanding  here  re- 
ferred to  is  not  merely  on  the  i)art  of  the  scientific  theorist! 
The  subject-matter  of  economic  science  is  itself  psycholog- 
ical.    It  includes  the  psychology  of  the  business  man,  as 
well  as  the  psychology  of  purchasers  and  laborers,  and  the 
general  field  of  social-mental  life  that  bears  on  economic 
processes.     It  includes  the  theories  of  the  business  men,  as 
well  as  their  aspirations  and  "motives."    It  includes  their 
methods  of  computation,  ^..d  the  accuracy  or  inaccuracy 
of  their  prognostications.     It  has  been  pointed  out  recently 
that  at  the  current  price  of  copper  (22c.  per  pound  in  Jan. 
1016)  the  prices  of  copper  stocks  are  very  much  lower  than 
they  were  when  copper  reached  the  same  price  some  years 
ago.     (^alumet  and  Hecla  stands  some  two  or  three  hun- 
dred points  lower  than  it  did  then,  and  the  same  percentage 
dilTerence  is  manifest  in  the  case  of  many  other  stocks. 
But  the  explanation  which  the  broker  and  market  writer 
offer  is  that  people  ha\e  awakened  to  the  fact  that  mining 
stocks  are  stocks  with  wasting  assets,  that  the  incomes  from 
copper  stocks  cannot,  therefore,  be  capitalized  on  so  high 
a  basis  as  similar  incomes  from  other  securities;  that  people 
to-day  realize  this  fact  as  they  did  not  some  years  ago;  that 
the  earlier  capital-prices  of  copper  stocks  were  vastly  ex- 
aggerated on  the  basi:-  of  a  careful  estimate  of  probable 
total  future  income,  etc.     Japan,  little  used  to  the  great 
prosperity  growing  out  of  sudden  great  increases  of  special 


THE   RFXONCII.IATION    OF   STATICS  AND  DYNAMICS      567 

kinds  of  business,  found  herself  in  such  an  orgy  of  war 
stock  speculation  that  it  was  necessary  to  close  the  stock 
exchange  in  1915.  The  United  States,  better  familiar 
with  the  phenomena  of  boom  and  depression,  seasoned  by 
many  experiences  of  similar  nature,  have  found  that  on 
the  whole,--at  least  in  the  opinion  of  many  competent 
judges  in  January  of  1Q16,  war  stock  speculation  has  been 
kept  in  reasonable  bounds,  thanks  in  large  part  to  the  con- 
servatism and  caution  of  bankers  and  brokers,  and  that 
the  general  economic  situation  is  in  fairly  stable  equilib- 
rium, with  most  of  the  probable  sources  of  disaster  fore- 
seen and  "discounted."  To  "discount"  is  to  make 
"static"  I  '  Whatever  the  business  man  can  reduce  to 
bookkeeping  terms,  and  whatever  he  can  measure  by 
money  in  the  market,  the  economist  should  be  able  to 
bring  within  the  "orderly  sequences  of  economic  law." 

In  Social  Value.  I  have  pointed  out  how  wide  is  the  scope 
of  the  money  measure.  Waves  of  [)ublic  opinion,  of  waning 
or  waxing  hope  and  belief,  of  patriotic  fervor,  of  religious 
exaltation,  of  political  movements  of  one  or  another  kind  - 
all  these  find  some  sort  of  money  measure  in  the  market. 
In  the  gold  market  in  the  early  '6o's  in  New  York,  the 
"bulls"  sang  "Dixie,"  and  the  bears  sang  "John  Brown's 
Body"!  It  was  patriotic  to  be  a  bear,  and  unpatriotic  to 
be  a  bull.  These  consiilerations  afTectefl  the  prices  very 
appreciably,  at  times,  especially  at  the  beginning  of  the 
speculation  in  Greenbacks.  Waning  and  waxing  belief 
in  the  triumph  of  the  Northern  armies  manifested  itself 
very  strikingly  in  the  prices  in  the  gold  market,  as  W.  C. 

•  On  Oct.  Q  of  1Q16,  I  still  venture  the  opinion  that  the  stock  market  has 
shown  wonderful  conservatism  in  the  face  of  extraordinary  temptations. 
From  Oct.  igij,  to  .\uk.  1016.  the  "bears"  dominated  the  market,  and 
prices  fell  pretlv  steadily.  The  "tniH""  movement  oi"  Sept.  lyid,  seems  to 
iiave  reached  its  crest  without  passing  the  level  of  a  year  ago.  The  market 
may  "run  away,"  but  it  has  not  yet  done  so. 


m 


568 


THK  VAU'K  (»F   MONKY 


Mitchell  has  conclusively  proved,  with  :i  wealth  of  detailef' 
evidence,  in  his  History  of  the  Greenbacks.  But  in  less 
systematic  markets,  in  less  oriranized  and  regular  ways, 
many  things  besides  are  given  a  money  measure:  "Against 
what,  indeed,  shall  wealth  he  measured?  Where  aru  the 
markets  which  measure  its  tluctuations? 

"But  such  markets  exist,  always  have  existed.  Are 
there  not  streets  where  woman's  virtue  is  sold?  Arc  there 
not  commonwealths  where  there  is  a  ruling  price  for  votes? 
Do  not  the  comparative  rewards  of  occupations  indicate 
what  inducements  will  overcome  the  love  of  independence, 
of  safety,  of  good  repute?  We  see  men  sacrificing  health, 
or  leisure,  or  family  life,  or  offs[)ring,  or  friends,  or  liberty, 
or  honor,  or  truth,  ft)r  gain.  The  volume  of  such  spiritual 
goods  Mammon  can  lure  into  the  market  measures  the 
power  of  money.  .  .  .  When  gold  cannot  shake  the  noble- 
man's pride  of  caste,  the  statesman's  patriotism,  the 
soldier's  honor,  the  wife's  fidelity,  the  official's  sense  of 
duty,  or  the  artist's  devotion  to  his  ideal,  wealth  is  cheap. 
But  when  maidens  yield  themselves  to  senile  moneybags, 
youths  swarm  about  the  unattractive  heiress,  judges  take 
bribes,  experts  sell  their  opinions  to  the  highest  bidder, 
and  genius  champions  the  cause  it  does  not  believe  in, 
wealth  is  rated  high."  (Ross,  Foundations  of  Sociology, 
pp.  1 71-17 2.)  Ross  is  here  interested  chiefly  in  the  problem 
of  measuring  the  varying  significance  of  wealth,  symbolized 
by  money,  in  terms  of  other  and  non-economic,  goods. 
But  it  is  equally  true  that  money  measures  these  goods. 
The  range  of  the  mone}-  measure  is  ver}-  wide.  Xor  is  it 
confined  to  the  exchanging  process.  Gabriel  Tarde  '  has 
pointed  out  that  money  may  function  as  a  measure  of 
non-material  goods  through  gifts,  public  subscriptions,  etc. 

It  is  surely  no  extravagant  claim  to  make  that  the  meth- 
'  Psycliologic  Eronomiquc,  vol.  I,  |>i>.  77"7S- 


THE  RFXONtlLUTION  OF   STATICS  AND  DYNAMICS      5f)Q 

ckIs  of  Static  economics  may  be  extended  at  least  as  far  as 
the  money  measure  goes!  We  shall  later  see  reason  for 
believing  that  fruitful  results  may  come  from  an  even 
wider  extension  of  the  static  notion,  at  least  as  a  schematic 

device. 

In  reducing  static  and  dynamic  considerations  to  com- 
mon terms,  we  have  now  gone  far.     We  have  shown  that  a 
wide  range  indeed  of  the  phenomena  deemed  dynamic,  and 
largely  ignored  by  current  static  theory,  left  to  the  dis- 
cussion of  such  innovating  students  of  the  "theory  of 
prosperity"  as  Veblen,  are  really  in  the  actual  practice  of 
the  business  world  treated  in  the  same  way  as  are  the 
"static"  phenomena  of  the  values  of  physical  goods  and 
concrete  services.    And  we  have  further  shown  how  wide 
indeed  is  the  scope  of  the  static  yardstick,  the  dollar.    But 
this  is  only  a  part  of  the  story.    We  have  generalized 
statics.    Can  we  similarly  generalize  d>Tiamics?    Or  has 
our  generalization  of  statics  merely  narrowed  the  field  of 
dynamic  considerations? 

To  this  I  reply  that  we  may  view  the  whole  field  like- 
wise from  the  angle  of  what  we  have  called  dynamics,  or 
theory  of  prosperity,  or  similar  name.     These  terms  are 
not  satisfactory,  in  my  view,  and  I  have  already  used  terms 
that  appear  to  me  better.    IMy  exposition  on  this  point  will 
be  briefer  than  in  the  generalization  of  statics,  since  I  may 
refer  to  what  I  have  said  elsewhere.     In  stating  Veblen's 
contrast  between  "business  capital"  and  "the  wealth  of 
nations,"  I  quoted  him  as  follows:  "Under  modem  condi- 
tions the  magnitude  of  the  business  capital  and  its  muta- 
tions from  day  to  day  are  in  great  measure  a  question  of 
folk  psychology  rather  than  of  material  fact."    The  capital, 
or  the  wealth  in  general,  of  older  and  simpler  days  was  a 
material  matter,  concrete  goods  and  ser\^ice5,  in  his  view. 
The  newer  items  of  capital  are  anomalies,  presenting  some- 


570 


Tin:   VALUE  OF  MOSEY 


ihinn  stran)?i'  and  novi'I,  and  sinister.     I  should  maintain 
that,  whethiT  sinistt-r  or  no.  thry  an-  in  primipir  at  li-ast 
not  ttiK'tl  or  aiiomaloHS.     All  iioiiomic  iiilius  arc  matters  of 
lolk-psydioloay!    All   cfononiic   values  arc   s«)iial   values. 
All  are  to  l)c  explained  on  ?he  same  general  priniiples  thu* 
exi)lain  the  values  of  the  most  complicated  stock-markii 
phenomena     except  of  course,  that  the  applic.ition  of  the 
principles  involves  less  complication  in  the  case  of  such 
values  as  that  of  a  loaf  of  bread.     Hut  value  is  always  a 
matter  of  psycholoj,'ical  si^jnificance,  and  never  a  matter  of 
mere  material  fact.     And  these  psycholo^'iial  significances 
are  not  e.xplained  by  such  simple  individual  phenomena 
as  labor-pain   or  marginal  utility,  but  always  by  reference 
to  the  total  social-mental  system,  including  its  laws,  its 
mores,  its  institutions,  its  centres  of  i)o\ver  and  prestige, 
its  modes  and  fashions,  etc.     If  \'eblen  has  in  mind  the 
contrast  between  goods  whose  values  rest  in  labor-pain  or 
marginal  utility,  on  the  one  hand,  and  values  which  rest 
in  a  folk-psychology  on  the  other  hand,  the  contrast  is  a 
false  one.    The  first  class  does  not  exist.    I  shall  not  elab- 
orate this  [)oint.     I  have  developed  it  at  length  in  Social 
Value,  and  in  the  chapter  on  "Economic  Value"  in  this 
L  '.  k.     I  s'auuld  make  the  contrast,  then,  which  seems  to 
me  to  gather  up  the  central  signitkance  of  most  of  the  con- 
trasts we  have  been  discussing,  as  follows:  on  the  one  hand, 
we  may  view  the  matter  mechanically  and  abstractly  .  in 
terms  of  the  equilibration  of  values  conceived  of  like  phjs- 
ical  forces,  expressed  in  prices;  on  the  other  hand,  we  may 
view    the    economic    situation    more    fundamentally    and 
realistically,  seeing  the  inteqjlay  of  men's  minds,  viewing 
economic  ^-alues  as  parts  of  a  social  mind,  a  functional  unity 
of  many  minds.     We  may  treat  society  as  a  mechanism, 
or  we  may  treat  it  as  a  living.  pul>Ing.  psychological  or- 
ganization.    In  short  terms,  our  contrast  may  be  between 


TIIK   RECONCILIATION   OK   STATICS  AND  DYNAMICS      57 1 


the  theory  of  value,  and  the  theory  of  price.    And  here  we 
are  back  to  our  thesis  set  forth  on  p.  550  of  this  chapter. 

The  theory  of  value,  as  thus  marked  out,  is  still  an  ab- 
straction from  the  totality  of  our  cross-section  picture  of 
social,  or  even  of  economic.  life.     The  essence  of  society  is 
indeed  psycholoj^eal.     But  men  have  bo<lies,  and  live  in  a 
material  worl«l.  and  have  an  elaborate  technology.     Many 
of  the  factors  which  students  of  dynamics  are  concerned 
with  grow  out  of  biological  and  technological  relationships, 
and  are  connected  with  physiographic  influences.    Can  we 
bring  all  these  into  our  scheme?    (iiddings  and  Spencer 
would  answer  afTirmatively.     For  Giddings  (Principles  of 
Sociology,  cd.   1905,  p.  363):  "All  social  energy  is  trans- 
muted physical  energy."    Giddings  guards  himself  (pp.  365- 
366)  against  a  thoroughgoing  monism,  which  would  leave 
no  distinction  between  mind  and  matter,  but  in  general 
he  would  hold  to  the  scientific  goal  of  reducing  the  physical 
and  psychical  phenomena  in  society  to  a  parallelism,  so 
that  concomitant   percentage  variation  could   be  predi- 
cated of  them,  and  so  that  considerations  in  one  sphere 
could  be  expressed  by  considerations  in  the  other.     In  the 
hands  of  Giddings  and  Spencer,  such  notions  are  handled 
with  caution  and  discrimination,  and  command  respectful 
consideration.    One  feels,  however,  th-'.t  the  starting  point 
is  a  monistic  metaphysics,  and  that  the  philosophical  doc- 
trine does  not  justify  itself  in  its  scientific  application.     In 
the  hands  of  such  a  writer  as  Winiarski,  however  [Ra'.  Pliil- 
osophique,  vol.  XLV.  pp.  351-386;  vol.  XLIX.  pp.  113- 134; 
summarized  by  Ross.  Foundations  of  Sociology,  pp.  156 
157),  who  makes  all  mental  states  mere  forms  of  phys- 
ical energy,  and  applies  to  mental  processes  the  laws  of 
mechanics,  the  doctrine  becomes  merely  bad  poetry!   From 
the  standpoint  of  the  needs  of  social  science,  anil  from  the 
standpoint  of  our  present  knowledge  of  social  facts — to 


57' 


THK    V.M.l'K   OF   MOXKY 


'  ! 


a.  ■ 


MJ 


say  nothing  of  general  philosophical  considerations — it 
seer  IS  clearly  best  to  nie  to  assume  the  common-sense 
doctrine  of  dualism  as  a  [in.'mise:  mind  and  matter  are  two 
different  things;  mind  acts  on  matter,  and  matter  acts  on 
mind.  We  are  then  at  this  position,  when  it  comes  to 
bringing  technological  and  physiographic  factors  into  our 
scheme:  on  the  one  hand,  the  values  control  techntiiogical 
applications,  and  control  the  course  of  indi  .try.  New 
technological  devices  will  he  employed  when  ric  present 
worth  of  their  antir'i)att(l  products  is  great  enou;,h  to  over- 
come the  \alues  that  compete  with  them.  Land  wall  be 
employed  on  that  crop  which  gives  the  largest  rent,  etc. 
Men's  phj.ical  activities,  and  their  employment  of  their 
physical  resources,  are  motivated  by  values.  That  is  the 
function  of  values.  On  the  other  hand,  physiographic 
and  technological  factors  modify  the  lives  and  characters 
of  men  and  peoples.  Values  are  in  part  controlled  by  phys- 
iographic and  technological  conditions  of  Kfe.  But  these 
technological  and  phjsiog'-aphic  factors,  in  order  to  in- 
fluence economic  conduct  must  first  influence  the  value 
system.  This  they  do.  (i)  by  alTecting  the  quantities  of 
objects  of  value,  and  so  modifying  the  marginal  rela- 
tions among  the  value-scales  and  the  marginal  values;  (2) 
by  affecting  the  lives  of  the  i)eople  directly,  and  so  modi- 
fying the  value-scales  themselves.  Similarly  I  see  no  way 
of  bringing  the  vitally  important  factor  of  heredity  into 
our  scheme  in  a  direct  manner,  in  propriorc  persona,  but 
only  mediately,  as  it  (i)  affects  the  character  of  the  society, 
and  so  changes  its  value-system  or  its  technological  activity 
and  volume  of  products,  or  {2)  as  heredity  becomes  a  matter 
of  concern  to  the  society,  and  so  an  object  of  value,  with  it^ 
owr  ])lace  in  the  value-system. 

There  remains,  therefore,  in  the  field  of  technological, 
biological,  and  physiographic  features  affecting  economic 


TJir;   KKCOXCILIATION   OF   STATICS  AND  DYNAMICS      573 


life  a  considerable  residuum  of  economic  problems  for 
which,  so  far  as  I  can  see,  no  extension  of  the  static  method 
can  be  deviserl.  I  propose  no  scheme  of  static  price  analy- 
sis for  balancins  the  effects  of  poor  land  and  good  heredity 
on  the  character  of  a  society.'  The  problem  must  be  ap- 
proached by  other  methods  specially  suited  to  it,  which 
we  need  not  here  discuss.  But,  given  the  values  that  rule 
in  that  society,  we  may  be  sure  that  our  static  picture  of 
that  value  system  will  sum  up  much  of  the  influence  of  the 
bad  land  and  the  good  heredity,  mingled  with  the  other 
factors  which  have  determined  that  set  of  values. 

Once  a  factor  has  been  introduced  into  the  value  system, 
once  it  has  modified  the  value-scales,  we  may  treat  it  by 
the  methods  of  static  price  theory.  The  analysis  of  the 
factors  cont'-olling  the  value-scales  is  the  problem  of  value 
theory.  And  here  is,  indeed,  the  central  problem  of  the 
"  theory  of  prosperity."  What  are  the  causes  controlling 
the  mutations  of  values?  What  factors  cause  values 
to  rise,  intensifying  economic  activity,  stimulating  trade, 
spreading  prosperity?  What  brings  about  the  crash  in 
economic  values  (and  consequently  in  prices),  in  panics 
and  crises?  Why  the  low  values  of  the  period  of  depres- 
sion, giving  slight  stimulus  to  industry  and  trade,  leaving 
economic  life  legarthic,  inert?  Increasingly  it  is  recog- 
nized that  the  problems  are  problems  of  values  and  prices. 
It  is  no  part  of  m\'  plan  to  give  answers  in  specific  terms  to 
these  questions.     That  were  the  task  of  a  large  book! 

»  Nor  do  I  sec  any  mclluxl  for  britiKiriK  into  our  equilibrium  i>''  ';  the 
control  which  the  en\  iroiinunt  retains  over  values  by  its  |)ower  ■  .linnle 
those  groups  whose  clioices  vary  t<K)  widely  from  the  norms  Oi  .rvival- 
necessilies."  l/V/.'  (liddinKS,  PriiuipUs  i-f  Stuiolony,  etl.  igoj,  p.  20;  Carver. 
Essavs  ill  S(Kii!l  Jiisiin;  piis^iiii.  I  think  that  the  ran^e  of  choices  com- 
patible with  survival  is  very  wide.  Moreover,  "adaptation"  is  not  a  simi)le 
matter  of  adjustment  to  the  physiographic  environment.  It  includes  ad- 
justment to  tlie  sotiai  i.h/h.n,  both  oi  the  group  in  question  and  of  other 
groups. 


^Mlt  .  ■ 


574 


THE   VALUE   OF  MONEY 


.*l|,:- 


M 

18- 

, 

M 

m 

, 

-m 

1^1, 

W 

^i' 

iii>i 

1] 

.  i 

1 

And  very  much  of  it  has  already  been  done.  It  is  my  pur- 
pose here,  simpl>-,  to  show  that  pi  Ice  theory,  as  developed 
on  the  basis  of  static  notions,  may  be  extended,  and  has  in 
considerable  measure  been  extended,  to  over  these  prob- 
lems, and  that  for  the  same  reason  that  price  theory  is 
unable  to  give  really  fundamental  answers  to  them,  often, 
it  is  likewise  unable  to  give  fundamental  answers  to  the 
value  problem  anywhere— that  the  phenomena  of  value 
are  of  the  same  stuff  and  substance  as  the  phenomena 
treated  by  "dynamics"  and  "the  theory  of  prosperity," 
and  that  static  theory  has  been  busied  chiefly  with  a 
limited  portion  of  the  field  only  because  the  problems  were 
easier  there.  Much  has  been  made,  especially  in  such  a 
book  as  VV.  C.  Mitchell's  Business  Cycles,  of  technological 
factors,  and  of  factors  in  the  psycholog>'  of  the  business  man 
and  of  the  laborer  in  the  ups  and  downs  of  business,  and 
particularly  of  certain  elements  of  scarcity  or  overabun- 
dance of  productive  resources  at  critical  parts  of  the  eco- 
nomic system,  which  raise  values  and  prices  unduly  at  cer- 
tain points,  compelling  radical  readjustments  of  values 
and  prices  elsewhere.  Virtually  all  of  these  considerations 
will  fit  into  the  scheme  here  outlined.  They  work  through 
modifications  of  the  system  of  values  and  prices.  H.  L. 
Moore's  recent  Economic  Cycles  lays  heavy  emphasis  on 
physiographic  factors,  particularly  variations  in  rainfall. 
But  these,  too,  act  on  the  economic  situation  through 
afTecting  the  quantities  of  objects  of  value,  and  so  through 
modification  of  the  marginal  values  of  goods.  The  psy- 
chological theory  of  economic  value  by  no  means  excludes 
any  amount  of  influence  one  can  find  in  physiographic  or 
technological  factors. 

One  of  the  most  important  factors  in  the  minds  of  many 
writers  who  would  treat  business  cycles,  and  a  factor  to 
which  virtually  all  writers  give  attention,  is  the  waxing 


THE   RECONCILIATION   OF   STATICS   AND   DYNAMICS      575 


and  waning  of  business  confidence,  and  v.  the  volume  of 
credit.  I  have  given  an  extended  analysis  of  the  psychol- 
ogy of  confidence,  and  of  the  psychological  nature  of  credit, 
in  my  chapters  on  that  topic.  It  is  enough  to  say  here 
that  we  have  in  credit  phenomena  things  which  are  of  the 
very  stuff  of  economic  values  in  general.  Beliefs  and  hopes 
are  factors  in  economic  values,  and  values  wax  antl  wane 
with  them.  There  is  little  indeed  in  the  psychological  and 
institutional  aspects  of  the  theory  of  prosperity  which  an 
adequate  theory  of  value  would  not  contain. 

The  theory  of  prices,  as  an  abstract  formula  of  descrip- 
tion, is  of  primary  interest  to  the  scientist,  who  has  nothing 
to  do  with  the  manipulation  of  concrete  values,  and  who 
has  no  interests  at  stake  in  the  behavior  of  particular  values 
at  a  particular  time.  His  purposes  are  ultimately  prac- 
tical, no  doubt,  but  the  practical  ends  he  has  in  view  are, 
after  all,  only  to  lay  down  general  rules  of  public  policy,  of 
a  high  degree  of  generality,  and  he  consequently  may  ab- 
stract from  a  great  deal  of  the  concrete  causal  process. 
The  theory  of  value,  in  its  concrete  fulness,  is  the  special  in- 
terest of  the  active  business  man,  and  especially  of  the 
business  i  i  ,n  who  wishes,  not  merely  to  adapt  himself  to 
changes  in  values,  but  also  in  part,  to  control  and  manipulate 
those  values.  lie  must  study  every  factor  which  does,  in 
fact,  bring  about  changes  in  the  value  system.  We  do  not 
find  the  market-letter  of  a  brokerage  house,  or  the  calcula- 
tions of  a  captain  of  industry,  or  trust  promoter,  troubling 
themselves  about  marginal  utilities  or  labor-pains!  No- 
tions of  supply  and  demand,  and  the  relations  of  the  pre- 
vailing interest  rate  to  the  capital  values  of  securities,  they 
do  employ.  Notions  of  money-costs  of  production  they 
make  use  of.  But  they  also  give  very  close  attention  to 
questions  of  governmental  policy,  to  court  decisions,  to 
movements  in  the  field  of  labor  organization,  to  money- 


h-'N!, 


.■>/' 


Tin:  VAi.ri;  or  m.inf.v 


|i 


market  phenomena,  ami  particularly  to  gold  movements 
and  the  state  of  the  exehan;,.  s,  to  political  campaigns,  to 
the  s'""gth  of  the  prohibition  movement,  to  changing 
fash  and  modes,  and.  above  all,  to  the  general  lone, 

the  consensus,  so  far  as  it  is  ascertainable,  as  to  whether 
business  is  good  or  bad.  whether  men  are  buoyant  or  de- 
pressed, to  the  ui)s  and  downs  of  business  confidence.  They 
j)ay  marked  attention  to  the  opinions  expressed  by  certain 
men.  great  bankers  or  industrial  leaders,  not  merely  be- 
cause they  think  these  men  good  judges,  but  also,  and  in 
part  primarily,  because  these  men  are  centres  of  power, 
"radiant  points  of  social  control,"  whose  opinions  make 
the  ophiions  of  others,  and  whose  statements  that  times 
are  good  tend  to  make  them  good,  and  that  times  are  bad 
tend  to  make  them  bad.  For  static  theory,  nothing  is  more 
contemptible  than  the  \iew  which  "demagogues"  often 
express  in  Congress  that  great  men  in  Wall  Street  make  and 
unmake  pro.sperity,  bring  about  and  check  panics.  For 
static  theory,  the  only  way  that  big  men  can  lower  prices 
is  by  selling,  and  the  only  way  they  can  raise  prices  is  by 
buying.'  Their  power  to  raise  and  lower  prices  is  thus 
limited  by  the  amount  of  their  wealth  which  they  are  willing 
to  employ  in  this  way.  As  it  is  not  likely  to  be  profitable 
to  be  a  bull  when  the  general  condition  of  the  "funda- 
mentals'* calls  for  falling  prices,  and  as  bear  operations, 
contrary  to  the  fundamentals,  are  likewise  usually  costly, 
the  inference  would  be  that  the  big  men  will  not.  even  if 
they  could,  alter  the  course  of  the  market.  Their  wealth 
is,  after  all,  not  so  tt-emendous,  as  compared  with  the  aggre- 
gate wealth  of  the  rest  of  the  community.  But  the  market 
takes  the  big  men  more  seriously!  When  they  are  selling 
heavily,  other  men  are  often  afraid  to  buy,  such  is  their 

'  r/.  H.  C.  lumen's  discussion  of  "miini|)uiation"  in  his  Speculation  in 
lite  Sluik  and  I'nhluif  /■'..\rli<iiiiiis,  |)p.  i7i(T. 


TIIK    KPXO.VCII.IATION   OF   STATICS   AND   DYNAMICS      577 


prestige.  When  they  give  out  opinions,  these  opinions 
become  the  opinions  of  a  host  of  others,  almost  automatic- 
ally. When  Morgan  stepped  into  the  breach  in  the  Panic 
of  1907  with  825,000,000,  it  was  quite  as  much  the  fact  that 
Morgan  had  acted,  as  it  was  the  millions  themselves,  which 
relieved  the  situation.  Indeed,  it  was  in  no  small  degree 
the  prestige  of  Morgan  which  relieved  the  disorganization, 
which  restored  the  discipline,  and  made  it  possible  for  the 
elements  in  the  market  to  work  in  harmony  and  coopera- 
tion again.  Society  is  a  functional  unity,  and  the  "tone 
of  business,"  the  ups  and  downs  of  prosperity,  depend  in 
large  measure  indeed  on  the  degree  to  which  the  lines  of 
communication  between  the  different  parts  are  kept  open, 
on  the  question  of  whether  each  part  does  its  expected  task 
at  the  right  time  and  in  the  right  way,  on  the  all-together- 
functioning,  the  integration,  of  the  elements.  These  are 
phases  of  the  matter  from  which  static  theory  abstracts. 
They  are  organic  problems,  not  mechanistic  problems.  Of 
course,  mechanisms  get  out  of  order  too.  But  tightening 
a  bolt  is  a  very  different  thing  from  restoring  confidence 
and  discipline  to  a  market ! 

Those  who  wish  to  control  values  have  their  own  tech- 
nology. There  is  a  technology  of  industry,  a  mechanical 
technolog>',  running  in  terms  of  pistons  and  levers  and 
soil-fertility-equivalents,  and  butter-fat-content,  and  ton- 
miles,  which  is  governed  by  the  values.  But  there  is  also 
a  technology'  of  controlling  values  which  involves  adver- 
tising, making  sentiment,  keeping  up  social  discipline, 
effecting  the  equilibration  of  values  by  exch?.nge,  keeping 
"interstitial"  adjustments  smooth,  which  involves  a  differ- 
ent kind  of  activity,  thought,  and  ability,  and  which  em- 
ploys different  instrumentalities.  Its  problems  are  prob- 
lems of  human  nature  and  social  relationships,  its  laws  are 
psychological   laws,  particularly   the  laws  of  suggestion, 


*:i; 


578 


Tiir:  vAU'i:  of  M(ini;y 


IbI^I' 


imitation,  ami  the  like,  its  tools  arc  the  newspaper,  the 
sign-board,  the  whispered  word,  the  cigar  and  the  dinner 
with  wine,  sound  logic,  money  and  credit  instruments,  the 
prestiges  of  men  and  institutions.  For  men  whose  work 
lies  in  controlling  and  making  values,  rather  than  in  making 
passive  technical  adjustments  to  existing  values,  the  theory 
of  value,  as  I  ha\e  defmed  it.  is  of  supreme  importance. 

This,  I  may  say  for  the  critic  who  ma\-  consider  the  social 
value  theory  a  highly  speculative  and  th(">retical  notion, 
does  not  mean  that  the  active  business  man  or  the  adver- 
tising writer,  has  formulated   the  social  value  theory  in 
terms  of  a  social  mind,  conceived  of,  in  the  light  of  modern 
functional  psychology,  as  a  functional  unity  of  individual 
minds!     The  advertising  writer  is  a  student  of  modem 
I)sychology.  and  reads  books  on  the  psychology  of  adver- 
tising, which  discuss  the  psychology  of  suggestion,  and  the 
like.     But  long  before  such  books  were  written  for  him.  he 
studied  the  phenomena  involved  in  his  own  way.     It  is 
not  his  business  to  construct  a  theoretical  economics!     It 
is  his  business  to  make  a  market  for  his  wares.     He  is  in- 
terested in  the  scientific  theories  of  modern  social  psychol- 
ogy only  in  so  far  as  they  hel])  him  in  that  task.     He  has 
no  occasion  to  construct  a  vast  conspectus,  which  shall 
summarize   the   whole   economic   situation,    in   its   social 
setting.     But  my  point  is,  simply,  that  the  kind  of  phenom- 
ena which  he  does  study  are  indicated  and  stressed  and 
brought  into  a  s\stem  in  the  theory  of  social  value  which  I 
have  tried   to  elaborate.    As  his  purposes  are  different 
from  those  of  the  economist,  his  method  of  approach,  and 
his  range  of  investigation,  will  necessarily  be  different. 

The  notion  of  chnamics  has  been  in  a  way  connected 
with  the  idea  of  evolution,  of  historical  process  in  time, 
while  the  notion  of  statics  has  been  essentially  connected 
with  the  notion  of  a  cross-section,  a  stage,  an  equilibrium 


THE   RECONCILIATION  OF   STATICS  AND  DYNAMICS      57Q 


of  contemporary  forces.  How.  then,  bring  the  two  to- 
gether? Of  course,  we  may  conceive  the  evolutionary 
process  itself  as  a  series  of  stages,  and  the  mind  does  tend 
almost  inevitably  to  do  that.  The  fact  is,  of  course,  a  per- 
petual flow,  with  unceasing  change.  The  mind  grasps  such 
a  notion  with  difikulty,  if  at  all.  Logic  is  mechanical  and 
mathematical,  and  mathematics  and  mechanics  are  static* 
But  further,  we  may  in  large  measure  bring  the  historical 
considerations  into  a  cross-section  picture,  when  it  is  a  value 
system  that  is  involved.  Past  facts  exert  their  influence 
through  present  values;  and  future  facts,  which  may  be 
expected  to  modify  future  values,  come  into  the  present 
equilibrium  as  discounted  present  worths. 

When  we  view  the  situation  realistically,  moreover,  — 
which  means,  when  we  view  it  as  a  living  organic,  psycho- 
logical process, — our  cross-section  does  not  need  to  be  nar- 
rowed to  a  moment  of  time.  We  may  see  the  values  not 
yet  in  stable  equilibrium,  but  in  process  of  equilibration, 
with  marginal  values  and  prices  fluctuating,  tending  toward 
a  static  goal,  but  hindered  by  various  cross-currents,  of 
"friction,"  of  uncertainty,  of  momentary  values  which 
rest  on  beliefs  regarding  the  process  of  transition  itself — 
as  when  a  "bull "  on  the  war-stocks  turns  bear  temporarily, 
because  he  thinks  that  prices  may  fall  before  recovering 
themselves,  and  going  higher.  We  may  see  obstacles  in  the 
way  of  readjustment  whose  importance  is  itself  subject  to 
static  measure— labor  temporarily  out  of  work,  and  labor- 
time  lost,  at  so  much  per  day;  uncertainties  which  give 
rise  to  speculation,  which  calls  for  the  employment  of  extra 
banking  credit,  at  such  and  such  per  cent;  capital-instru- 
ments which  have  to  be  "scrapped,"  representing  the  loss 
of  so  many  dollars.    We  may  see  the  process  of  building 

*  Cf.  Dewey,  Essays  in  Logical  Theory;  Bergson,  Time  and  Free  Will, 
passim,  and  Creative  Evolution;  James,  Problems  of  Philosophy. 


«i 


H 


S8o 


TiiF  vM.rr  or  monky 


up  new  trade  c.mnections,  at  such  and  such  a  cost,  to  re- 
place others  which  formerly  functional,  but  wh.,  h  n..  longer 
Uve  which  were  once  worth  so  nun  h.  and  whuh  now  are 
valueless.  VVatchinK  the  realistic  pnuess  of  transition, 
throufjh  a  peri.ul  of  time,  we  may  still  apply  our  static 
yardstick  to  many  .f  its  features. 

Above  all,  do  we  ^et  in  this  conn.-ct.on  a  rej^^^f  tu.n/'^ 
the  fact  that  the  "immaterial  capital"  of  which  Veb len 
speaks  is  true  social  wealth.'    Whatever  is  necessary  for 
the  carr^•ing  on  of  economic  life,  whatever,  if  destroyed, 
must  be' replaced,  before  the  economic  process  can  go  on 
and  will  be  replaced  by  the  expenditure  of  labor  am  thought 
and  monev,  is  capital.    The  sales-force  is  as  truly  a  part 
of  the  labor-force  of  a  coq^oration  as  are  the  mechanics. 
The  trade  connections  which  the  sales-force  has  built  up 
is  as  truly  a  part  of  the  capital  of  the  business  as  the  ma- 
chines which  the  mechanics  have  made.    The  static  theory 
which  abstracts  from  this  easily  leads  to  dangerous  con- 
clusions.   Removing  a  tariflf  may  well,  after  the  transition  ts 
completed,  give  a  greater  productive  efficiency  to  a  country 
But  what  of  the  cost  of  transition?     May  not  the  values 
destroyed,  and  to  be  recreated,  in  the  form  of  trade  connec- 
tions, social  organization,  accomplished  adjustments,  and 
the  like,  be  greater  than  the  new  values  to  be  gained  by 
better  adaptation  of  industry  to  the  physical  resources  or 
the  capacities  of  the  labor  supply,  of  the  country?    In  large 
measure,  this  question,  in  a  given  case,  is  susceptible  to  a 
quantitative  answer.    The  statesman  who  reckons  only 
the  gains  which  the  final  static  adjustment  will  bring,  and 
neglects   the   costs   of   reaching   it,    costs   not   alone   m 

>.Y    •i.„n^hnt's  discussion  in  Lombard  Slnrt  of  the  features  of  English 
supra. 


T„F.  Rr.COKC...UT.ON-  OP  STATICS  AND  DVNAM.CS 


58' 


...capped"  macMne.  '>"-^- J^'^r.^^^^^il. "'" 
Rani.atton.hasm«se<Usub>tanla  par  ^^^ 

The  .he..ry  „f  prospenty  and   he  ^c  .y  ^_^_^^^^, 

largely  concerned  with  just   his  '^^  f"^ 
by  means  of  «hich  value  -^'^  ""^:f„ewt,uUibrium. 
oLhich  a.tel«i  ^^l^^^'X^,Z^:^  Zionships. 
It  is  a  comphcatc.1  (abnc  01  psy        »    .    ,i„„ai.    The 

partly  .-''— kf  biHr^-Xn",  speculative  ex- 

-r ":.-e^  -  - -I-\:^^^^^^^ 

S::^tr:hl'^tSir^>'>-Hiso.anic,and 

not  mechanical.  country  may  well 

The  serious  injury  of  th^s  sy^^em  n  y        .^^^^ 

be  a  greater  disaster  than  the  ^l'!^^^""^^,^^^^  ^bout  a 
Let  unscrupulous  men-or  "^^^f/^^^^  ^f'^^  ^y  be  greater 
legal  repudiation  of  ^^^^l^^;^^^^^^^^  That 

than  the  destruction  of  a  city  b>  an  q       ^^^  ^^^^ 

creditors  have  been  robbed  a  mino  m  ^^ ,  ^^^^  ^^^.^ 
credit  has  been  sha^n  -  ^^^X,,  ,,,,,trial  paralysis, 
or  to  sell  except  lor  casn,  may  substantia  degree. 

Considerations  like  these  enable .«.  '"^""^^^^  ,^™, 

to  reduce  "transitional"  "-<1«;^  ^J"  "^^e  static 

.,,  ..norm.''  -^-^r^o  Jde.^;::."'"  and  we  tad 
measure  to  the     transiuuua  .        .    .i^g  "normal' 

the  values  which  "-  into  equd  *""»»  *'^.^^^^^  ;„. 
period  to  be  genericaUy  hke  those  whose 

'"T-i^^iff  :  r:'r:Sed' wotd  .so  conta. 
equihbnum,    "  n  wcic  c  would 

tSese intangible  Jitait™.^  have  to  do 

t^r t  Cf  SO^ «  *e  normal  e<,ui,ibrium  were  per- 
*lrLs  not  follow  from  the  foregoing  that  many  of  the 


582 


TIIE  VALUK  OF  MONEY 


:!';■' 


elements  in  "modem  business  capital"  are  not,  as  Veblen's 
analysis  suggests,  sinister  and  anti-social.  To  say  that 
their  values  are  true  social  economic  values,  generically 
the  same  as  the  values  of  wheat  or  corn  or  whiskey  or 
opium  or  Sanatogen  or  milk  or  tickets  to  burlesque  shows, 
or  silver  sacramental  sets,  or  Ford  automobiles,  is  not 
necessarily  to  give  them  a  good  moral  character!  Some  of 
these  intangible  capital  goods  are  thoroughly  anti-social, 
and  should  be  destroyed.  This  is  particularly  true  of 
monopoly  power,  and  of  popular  brands  whose  value  rests 
in  popular  delusion.  But  even  here,  caution  is  needed. 
Is  it  socially  wise  to  destroy  a  wine  cellar,  containing  an 
hundred  thousand  dollars  worth  of  line  wines,  even  assum- 
ing that  Demon  Rum  is  as  black  as  he  is  painted,  and  that 
Veuve  Cliquot  is  his  favorite  daughter?  Will  not  the 
economic  values  which  have  been  destroyed  in  this  moral 
fervor  be  recreated?  And  will  not  this  tend  to  divert  labor 
and  capital  from  the  creation  of  a  corresponding  amount  of 
more  wholesome  economic  goods?  Might  it  not  be  wiser 
from  the  standpoint  of  the  temperance  movement  itself, 
to  sell  the  wine  cellar — at  private  sale,  of  course! — and  use 
the  proceeds  in  the  campaign  fund  of  the  prohibition  party? 
Of  course,  there  is  more  still  to  the  story.  The  destruction 
of  the  wine  cellar  may  be  done  so  dramatically,  and  may  be 
so  well  advertised,  that  it  will  arrest  public  attention,  and 
tend  to  create  new  social  values,  of  a  moral  and  legal  sort, 
which  will  prevent  the  recreating  of  that  wine,  by  changing 
the  direction  of  demand,  and  by  lessening  the  sources  of 
supply.  Similarly  with  trade  connections,  and  other  in- 
tangible capital  items.  If  destroying  one  means  merely 
that  labor  and  capital  will  be  employed  in  making  others 
no  better,  the  social  gain  is  very  doubtful.  And  some  sort 
of  system  of  control  of  interstitial  adjustment,  of  over- 
coming friction,  etc.,  there  must  be. 


THE  RECONCILIATION  OF   STATICS  AND  DYNAMICS      583 

I  wish  to  contrast  the  view  I  have  been  here  presenting 
with  that  developed  by  Schumpeter,  in  his  Theorie  der 
Wirtschajllichcn  Entwicklung.  In  Schumpeter's  view,  the 
division  between  statics  and  dynamics  is  much  more  than 
methodological.  The  phenomena  of  statics  and  dyniamics 
are  different  phenomena.  Statics  is  concerned  with  the 
influence  of  individual  utility-scales,  or  utility-scales  and 
psychic  cost-scales,  hedonistic  phenomena.  Dynamics  is 
concerned  with  the  influence  cf  " energisch,"  (as  distin- 
guished from  "//fJoni^cA")  factors.  (Loc.  cit.,  12S.)  Most 
men  are  moved  by  hedonic  considerations.  Their  eco- 
nomic activity  tends  toward  the  equilibrium  described  in 
static  theory.  Seeking  to  maximize  satisfactions,  and  to 
minimize  pains,  they  tend  to  get  into  the  "best-possible" 
situation  ("best-possible"  under  the  "given  conditions") 
and  stay  there.  The  "energetic"  type  of  men,  moved  by 
motives  like  love  of  activity  for  its  ovm  sake,  love  of  creative 
activity,  love  of  distinction,  love  of  victory  over  others, 
love  of  the  game,  etc.,  undertake  activities  which  tend  to 
alter  the  "given  conditions"  themselves,  to  alter  the  struc- 
ture and  technique  of  economic  society,  to  introduce  new 
ways  of  doing  things,  and  so  to  break  the  static  equilih  ■ 
rium.  This  last  type  of  men  is  small  in  number,  but  tre- 
mendously important.  Schumpeter's  theory  of  value 
rests  solely  in  an  analysis  of  the  hedonic  factors  mentioned, 
conceived  of  as  individual  psychological  magnitudes.  I 
have  discussed  his  theory  of  value  in  the  chapter  on  "Mar- 
ginal Utility"  in  this  book,  and  would  refer  to  that  discus- 
sion here.  He  makes  vnrtually  no  use  of  the  value  concept 
there  developed  in  explaining  the  causation  of  dynamic 
change,  but  instead,  as  I  have  pointed  out  in  that  chapter, 
invents  new  concepts,  which  do  the  work  of  the  value 
concept,  which  he  calls  ''Kaufkrajt,"  ''Kapital,"  and 
"Kredit,"  which  do  not  rest  on  marginal  utility,  but  rather 


^«4 


THE  VALUE  OF   MONEY 


..Jlli 


on  the  activities  of  certain  centres  of  economic  power,  par- 
ticularly of  banks.'  His  picture  of  economic  evolution  is 
that  of  a  conflict  Ix'twccn  these  static  ami  dynamic  forces, 
between  "utility-curves"  and  the  psychological  factors  of 
the  "encrpetic"  tjpc,  the  former  represented  in  a  set  of 
static  price-ratios,  the  latter  in  a  set  of  dynamic  "powers," 
conceived  of,  not  as  sums  of  money  (even  though  e.vprcssed 
in  money-terms),  but  as  "abstract  j)ower,"  which  grows, 
not  merely  out  of  the  individual  psychologies  of  the  entre- 
preneurs, but  also,  and  primarily,  out  of  the  social  influence 
centered  in  the  banker.  This  power  which  the  banker 
to-day  supplies  was  in  earlier  periods  supplied  by  the  polit- 
ical power  of  the  despot,  and  is  distinctly  a  matter  of  social 
organization,  and  social  control,  an  over-individual,  social 
phenomenon,  analogous  to  the  "social  value"  which  I 
have  sought  to  put  behind  all  prices,  whether  "static"  or 
"dytiamic."  The  dynamic  man  needs  "power,"  either 
political  or  financial,  lo  "force"  the  "static"  men  out  of 
their  accustomed  ways  of  activity.  They  fear  and  resist 
him.  He  must  coerce  them.  The  contrast  is  thus  sharply 
made  between  abstract  price-ratios,  resting  on  individual 
feeling-scales,  and  quantitative  "powers,"  measured  in 
money,  resting  on  a  social  basis.  Between  the  factors 
underlying  static  prices,  and  those  underlying  dynamic 
prices  there  is.  thus,  nothing  in  common.  Statics  and 
dynamics  are  concerned  with  fundamentally  different  phe- 
nomena.- 

'  C/.  my  article  on  "  Schumpeter's  Dynamic  Kconomics"  in  Political 
Science  Quarterly,  Dec.  igis,  and  ch.  XXIII,  supra. 

2  In  my  article  on  Schumpeter's  theory  alxjve  mentioned,  I  have  i>ointed 
out  that  his  contrast  between  statics  and  (l\nanii<s  is  not  by  any  means  a 
fixed  one,  and  that  in  particular  he  shifts  back  and  forth  between  a  hyix)- 
thetical  static  state,  primarily  .1  methodological  device,  which  assumes 
perfect  fluidity  and  mobiiil>  c  'i  iiie  objei  l>  of  e\i  iiaiige,  011  llic  one  luiliii,  and 
a  realistic  static  state,  immobile,  held  in  the  bonds  of  custom  and  tradition, 
illustrated  by  India  and  China,  on  the  other  hand.    The  version  of  the 


THE   RECONCILIATION  OF   STATU  S  AND  DYN  >  IICS     585 

If  my  criticisms  of  the  utility  theory  of  value  are  sound, 
and  if  what  has  gone  before  in  this  chapter  holds  goixl,  we 
must  restate  Schumpeter's  contrast. '     The  static  tendencies 
do  not  rest  on  any  peculiarities  of  the  psychological  "stufT" 
from  which  static  values  are  derived.    They  rest  rather 
in  the  universal  tendencies  of  all  values,  whatever  the 
psychological  factors  behind  them,  to  come  to  an  equilib- 
rium.   The  reason  that  values,  whether  they  be  the  values 
of  new  and  novel  things,  or  the  values  of  old  and  familiar 
things,  tend  to  come  to  an  equilibrium  is  that  gains  come 
from  equilibrating  them.    When  some  values  are  too  low, 
and  some  are  too  high,  the  opportunities  for  speculative 
gain  are  evident.    Arbitraging  transactions,  as  between 
different  places,  time-speculation,  transferring  labor  and 
capital   from  one  enterprise   to  another,   increasing   the 
supplies  of  some  goods  and  reducing  the  supplies  of  other, 
changing  land  from  wheat  to  com,  etc.,  etc.,— all  these 
things  are  sources  of  gain,  and  they  will  be  done,  whatever 
the  origin  of  the  values  involved.    The  new,  dynamic 
enterprise,  before  it  becomes  actualized  in  concrete  ma- 
chinery, factory  building,  etc.,  and  long  before  its  income 
is  actualized  in  money-receipts  from  the  goods  it  is  destined 
to  produce,  becomes  an  object  of  value.    The  value  is  a 
future  value.    But  it  comes  into  the  present  as  a  discounted 
present  worth.    As  such  it  functions  like  any  other  value, 
tending  to  attract  in  its  own  direction  the  land,  labor  and 

distinction  between  statics  and  dynamics  here  discussed  is  only  one  of  several 
which  he  gives.  It  is,  however,  the  one  which  at  present  I  wish  to  contrast 
with  my  own  view.  With  many  of  Schumpeter's  doctrines  I  am  in  hearty 
accord,  and  I  have  learned  much  from  his  book.  I  think  that  his  book  af- 
fords abundant  evidence  of  the  usefulness  of  the  static-dynamic  contrast. 

'  Schumpeter's  contrast  between  statics  and  dynamics  is  in  most  essen- 
tials closely  parallel  to  Veblen's  contrast  between  the  theory  of  wealth  and 
the  theory  of  prosperity,  and  his  main  conclusions  resemble  Veblen's,  de- 
spite Schumpcler's  optimism  and  Veblen's  pessimism,  and  despite  temper- 
amental and  methodoloRital  differences.  Most  of  my  criticisms  of  Veblen 
apply  also  to  Schumpeter. 


'Ml: 


586 


THE  VALUE  OF  MONEY 


i 


capital  necessary  for  its  realization.  It  does  not  differ  in 
its  functioning  from  the  present  worths  of  future  goods  of 
familiar  sorts.'  It  tends,  after  a  process  of  reequilibration 
— which  Schumpeter,  with  his  theory  of  crises,  has  done 
much  to  elucidate — to  come  into  equilibrium  with  the  older, 
"static"  values,  becomes  itself  a  static  value.  Indeed, 
from  its  inception,  it  comes  under  the  static,  money  meas- 
ure. It  enters  at  once  into  the  scheme  of  static  values  and 
prices,  even  though  it  causes  readjustment  there. 

The  preexisting  static  values  are  themselves  to  be  ex- 
plained, not  as  growing  out  of  individual  feeling-scales, 
but  as  growing  out  of  a  complex  social  psychology,  in  which 
some  men  and  groups  of  men  have  vastly  greater  social 
''power"  than  others.  The  preexisting  static  values  are 
of  the  same  stuff  as  the  djTiamic  values.  But  this  has 
already  been  made  clear. 


!  '■^1 


The  possibility  of  presenting  an  equilibrium  picture  of 
social  forces,  to  the  extent  that  those  social  forces  submit 
themselves  to  the  money  measure,  the  possibility  of  apply- 
ing the  methods  of  static  price-theory  wherever  pecimiary 
concepts  may  be  carried,  does  not  exhaust  the  possibilities 
of  the  static  notion,  at  least  as  a  schematic  device.  There 
are  many  social  values,  particularly  in  the  legal  and  moral 
sphere,  which  do  not  readily  come  under  the  money  meas- 
ure, and  where  such  measuren:ents  as  may  be  made  in 
money  terms  seem  obviously  inadequate.  Of  these  values, 
as  of  all  values,  however,  the  law  of  equilibration  holds. 
AH  tend  to  come  into  adjustment  of  a  sort  that  will  allow 
the  maximum  of  values  to  be  realized.  Something  of  the 
exactness  of  the  static  method  has  recently  appeared  in  a 
decision  by  a  famous  jurist,  confronted  A'ith  the  fact  of 
the  conflict  of  two  legal  principles.  Most  judges  would  go 
'  Cf.  our  discussion,  supra,  of  the  relation  of  credit  to  futurity. 


THE   RECONCILIATION   OF   STATICS  AND  DYNAMICS      587 

on  the  legal  theory  that  there  can  be  no  conflict  in  the  laws 
of  a  single  sovereign.  Of  course,  we  have  courses  in  "Con- 
flicts of  Laws"  in  our  law  schools,  but  the  subjects  treated 
in  such  courses  relate  to  conflicts,  say,  between  the  laws  of 
New  York  and  the  laws  of  New  Jersey.  When  a  judge  is 
presented  with  a  case  of  conflict  between  two  laws  of  New 
York,  he  will  commonly  feel  it  to  be  his  duty  to  "remove" 
the  conflict,  by  making  distinctions,  till  the  conflict  is 
whittled  away.  Not  a  little  bad  law  has  thus  originated! 
The  law  is  "absolute."  It  knows  no  exceptions.  It  does 
not  obey  the  law  of  diminishing  significance.  Of  course, 
"de  minimis  non  curat  /ex,"  but  that  means,  not  that  there 
is  a  delicate  margin,  where  the  law  ceases  to  apply,  buc 
merely  that  the  law  disregards  trifles  too  insignificant  to 
attract  its  attention  at  all.  They  are,  in  mathematical 
phrase,  "infinitesimals  of  the  second  order,"  discontinuous 
with  the  interests  of  magnitude  great  enough  to  attract 
the  attention  of  the  law.  There  is  little  room  in  such  a 
legal  theory  for  notions  of  the  sort  discussed  in  this  chapter 
to  find  place!  But  a  different  theory  of  the  law  is  implied, 
and  partly  expressed,  in  a  recent  decision  by  Mr.  Justice 
Holmes:  "All  rights  tend  to  declare  themselves  absolute 
to  their  log'cal  extreme.  Yet  all  in  fact  are  limited  by  the 
neighborhood  of  principles  of  policy  which  are  other  than 
those  on  wh5ch  the  particular  right  is  founded,  and  which 
become  strong  enough  to  hold  their  own  when  a  certain 
point  is  readied.  The  b'mits  set  to  property  by  other 
public  interests  pr  sent  themselves  as  a  branch  of  what  is 
called  the  police  power  of  the  State.  The  boundary  at 
which  the  conflicting  interests  balance  cannot  be  deter- 
mined by  any  general  formula  in  advance,  but  points  along 
the  line,  or  helping  to  establish  it,  are  fixed  by  decisions 
that  this  or  that  concrete  case  falls  on  the  nearer  or  farther 
side.  ...  It  constantly  is  necessary  to  reconcile  and  adjust 


588  THE   VALUE  OF   MONEY 

different  constitutional  principles,  each  of  which  would  be 
entitled  to  possession  of  the  disputed  ground  but  for  the 
presence  of  the  others."    (Hudson  County  Water  Co.  vs. 
McCarter,  209  U.  S.,  349,  1908.)    Here  we  have  a  scheme 
very  like  that  of  static  economic  theory!    "The  boundary 
at  which  the  conflicting  interests  balance"— the  margin 
where  the  curves  of  diminishing  value  of  the  two  legal 
principles  intersect !    A  plurality  of  legal  values,  in  marginal 
equilibrium!    Lacking  a  tool  of  thought  so  convenient  as 
money  has  proved  for  the  economist,  the  jurist  finds  trouble 
in  making  his  margins  precise.    He  is  dealing  with  quan- 
tities for  which  he  has  found  no  common  measure.    There 
is  no  "standard  or  common  measure"  of  legal  values. 
Hence,  most  lawyers  content  themselves  with  qualitative 
reasoning,  seeking  to  avoid  the  necessity  of  quantitative 
weighing  and  comparison  of  the  factors  in  their  problem 
by  making   distinctions  of   kind.    Mr.   Justice  Hobnes 
recognizes  the  necessity  and  the  existence  of  legal  quantities, 
and  of  making  quantitative  distinctions,  i.  e.,  distinctions 
of  degree.    He  sees  a  generic  essence  common  to  the  whole 
body  of  laws,  such  that  marginal  equilibria  are  possible  and 
actual. 

So  far  we  have  a  static  system  of  laws.  But  the  same 
writer,  in  a  later  decision,  has  said:  "And  yet  again  the 
extent  to  which  legislation  may  modify  and  restrict  the 
uses  of  property  consistently  with  the  constitution  is  not  a 
question  for  pure  abstract  theory  alone.  Tradition  and 
the  habits  of  a  community  count  for  more  than  logic." 
(Laurel  Hill  Cemetery  vs.  San  Francisco,  216  U.  S.  358, 
iQio.)  As  these  traditions  and  habits  of  a  community 
may  change,  so  may  the  legal  values  change,  and  new 
equilibria  need  to  be  reached  in  a  process  of  readjustment. 

But  further,  in  this  view,  and  in  the  view  of  the  best 
students  of  jurisprudence  in  general,  the  legal  values  are  not 


THE  RECONCILIATION  OF  STATICS  AND  DYNAMICS      589 

an  insulated,  self-contained  system.  In  the  sentence  last 
quoted,  Justice  Holmes  sees  their  root  in  a  total  social  situa- 
tion. And  it  is  easy  to  show  that  economic  values,  in 
particular,  are  part  of  that  social  situation  out  of  which 
legal  values  derive  their  power.  Legal  values  enter  into 
economic  values.  Economic  values  enter  into  legal  values. 
And  between  legal  values  and  economic  values  are  marginal 
equilibria.  There  is  a  vast  social  system  of  values,  legal, 
economic,  moral,  religious,  etc.,  in  constant  dynamic 
change,  but  tenduig  also  to  static  equilibrium.  Changes 
at  any  part  of  the  system  compel  readjustments  through- 
out. The  process  of  equilibration  is  often  slow,  but  slow 
or  rapid,  smooth  or  violent,  it  is  in  constant  process.  For 
the  further  elaboration  of  notions  like  these,  I  refer  again 
to  my  Social  Value.  Here,  as  in  the  narrower  economic 
sphere,  we  have  men  and  institutions  whose  chief  activity 
is  concerned  with  the  manipulation  and  control  of  these 
values,  with  effecting  the  readjustments,  and  bringing 
about  the  reequilibrations.  They  have  their  appropriate 
tools  and  technology.  Money  and  credit  are  merely  part 
of  a  much  wider  system  concerned  with  social  control  and 
social  adjustment! 


To  summarize:  The  problem  of  this  chapter  has  been 
to  harmonize  statics  and  dynamics,  the  "theory  of  wealth" 
and  the  "theory  of  prosperity,"  "normal"  and  "transi- 
tional," and  similar  notions,  commonly  held  to  belong  to 
different  spheres,  and  to  be  incapable  of  reduction  to  com- 
mon terms.  A  number  of  such  contrasts  have  been  passed 
in  review,  and  numerous  illustrations  of  the  various  types 
of  contrast  have  been  given.  It  is  the  contention  of  the 
present  chapter  that  the  most  fundamental  of  these  con- 
trasts, and  the  one  which  gathers  up  the  meaning  of  most 
of  them,  is  that  between  the  theory  of  value,  and  the  theory 


II 


590 


THE  VALUE   OF   MONEY 


of  price.  The  theory  of  value  is  dynamic,  is  concerned 
with  the  phenomena  of  prosperity  and  depression,  is 
realistic  enough  to  deal  with  transitions  and  readjustments; 
the  theory  of  price  is  static,  and  rests  in  the  notion  of  ac- 
complished equilibrium,  abstracting  from  the  problems  of 
friction  and  transition.  The  reconciliation  comes  from 
two  angles:  on  the  one  hand  we  have  generalized  price 
theory,  showing  that  in  large  measure  the  phenomena 
with  which  value  theory,  theory  of  prosperity,  dynamics, 
deal  come  under  the  money  measure,  are  made  "static" 
by  "discounting,"  and  by  the  application  of  accounting 
principles;  that  this  tends  to  be  more  and  more  true  as 
knowledge  grows  more  accurate;  that  "statics"  means 
especially  quantitative,  as  opposed  to  merely  qualitative, 
thinking.  We  have  shown  further  that  the  static  schema 
is  applicable  even  where  the  m'niey  measure  is  inappli- 
cable, and  even  beyond  the  economic  sphere,  as  illustrated 
by  a  recent  decision  of  Justice  Holmes.  The  other  angle 
of  approach  was  to  universalize  value  theory,  dynamics, 
theory  of  prosperity,  by  showing  that  all  prices,  whether 
"static"  or  "djTiamic"  have  the  same  fundamental  sort 
of  explanation,  that  value  is  always  a  matter  of  social  psy- 
chology, and  never  a  matter  of  mere  individual  psychical 
magnitudes,  or  of  "material  fact."  This  is  not  to  deny 
that  physical  facts  have  their  bearing  in  the  scheme: 
(a)  they  are  among  the  objects  of  value,  even  though  not 
the  only  objects,  and  (b)  material  facts,  technological,  phys- 
iographic, and  biological,  are  the  basis  on  which  human 
nature  rests,  out  of  which  it  has  developed,  even  though 
human  culture  including  social  values  has  increasingly 
emancipated  itself  from  immediate  dependence  on  them, 
and  has  acquired  a  partially  independent  movement  of  its 
own.  The  effort  was  not  made  to  reduce  mind  and  matter 
to  common  terms,  but  the  case  was  rested  in  an  irreducible 


THE  RECONCILUTION  OF  STATICS  AND  DYNAMICS      59I 


dualism,  and  the  causal  influence  of  non-mental  factors  on 
the  value-scales  themselves  cannot  be  measured  by  the 
static  scheme.     The  static  scheme,  assuming  the  value- 
scales,  gives  a  precise  answer  as  to  the  influence  of  the 
quantities  of  physical  objects  on  the  marginal  values. 
The  significant  fact  about  the  values  with  which  dynamics, 
theory  of  prosperity,  etc.,  deal  is  that  they  are  the  values 
of  immaterial  social  relationships  and  institutions,  in  large 
part,  which  are  concerned  with  the  problems  of  social 
adjustment  and  control,  with  affecting  equilibria  in  the 
economic  sphere,  with  overcoming  the  friction  and  effecting 
the  transitions  from  which  static  theory  abstracts.    This 
is  a  phase  of  production  quite  as  important  as  the  physical 
activities  of  laborers  or  machines.    It  has  its  own  tech- 
nology, appropriate  to  its  problems.    In  particular,  money 
and  credit  are  part  of  its  tools.    Since  its  problems  are  to 
control  men's  mmds,  it  uses  psychological  forces.    Where 
the  mechanic  uses  a  storage  battery,  charged  with  elec- 
tricity, to  move  material  things,  the  technologist  of  eco- 
nomic readjustment  employs  a  dollar,  charged  with  social 
value,  which  is  power  over  the  action  of  men.     It  is  as  a 
bearer  of  value,  in  form  adapted  to  the  problem,  that  is  in 
highly  saleable  form,  that  the  dollar  functions.    It  is  the 
psychological  significance  of  the  dollar,  and  not  its  physical 
qualities  per  sc,  that  enables  it  to  do  its  work.     The  phys- 
ical weight  in  gold,  which  itself  is  an  object  of  social  value, 
is  commonly  the  unmediate  basis  of  the  value  of  the  dollar 
to-day,  but  money  may  get  its  primary  value  from  other 
sources  than  valuable  bullion.     Given  this  primary  value, 
the  dollar  may  get  an  enchancement  in  that  value  from  the 
services  which  it  performs  in  the  social  technology  of 
adjustment. 


INDEX 


1 


Aborn,  VV.  H.,  252,  n. 

Absolute  vs.  relative  conreptions  of 
value.  See  Value,  Absolute  vs. 
Relative. 

.Abstinence,  67!!.,  484-85.  See 
Cost  of  Production,  Interest. 

Abstraction,  legitimate  and  illegit- 
imate, 189-90,  553-54. 

Acceptance  house,  497,  542. 

.Acquisition  vs.  production,  482. 

Adams,  Brooks,  219. 

.Adams,  T.  S.,  13. 

"Adaptation,"  573,  n. 

.Advertising,  257-58,  367,  565. 

Agger,  E.  E.,  140,  n. 

Agio,  148-50,  390,  442-50-  Sec 
Premium. 

.Agricultural  credit,  262,  318-19. 
430,  492.  504-05,  528-29- 

"All  other  deposits,"  see  "Depos- 
its "  in  Kinley's  figures. 

Americas,  The,  540. 

.Analytical  vs.  historical  theories, 
397-400.  See  also  Historical 
vs.  Cross-section  Viewpoints, 
Statics,  Dynamics,  etc. 

Andrew,  A.  P.,  170,  n.,  179,  537. 

.Animism,  social  explanation  of,  16- 

17- 

.Ansiaux,  M.,  4,  n. 

"Appreciation  and  interest,"  76B., 
333,  n.    See  Interest. 

.Aquinas,  Thomas,  30. 

Arbitrage,  268,  585. 

.Aristotle,  118,  n. 

Ashley,  VV.  J.,  181,  n. 

Assets  nf  hanks,  285,  489-97,  Ch. 
XXIV;  bonds  in,  250,  488,  498, 
506,  508,  523;  stocks  in,  491-93, 
498,   506,   523;    stock   exchange 

593 


items  chief  factor  in,  Ch.  XXIV, 
especially  523ff.  See  Loans, 
"CoMMERcuL  Paper,"  Col- 
lateral Loans,  Reserves,  etc. 

Atwood,  .A.  W.,  173,  n. 

Auspitz  and  Lieben,  91,  n. 

Austrian  School,  56,  70, 94,  jcx),  486, 
562,  n. 

Austria,  paper  money  in,  140,  434, 
n.;  foreign  exchange  policy  of, 
181-82,  434,  n.,  444,  530;  money 
rates  and  interest  rates  in,  429. 

Averages,  meaning  of,  178,  292, 
312-13,  315.  See  Causation. 
Weighted.    See  Weighting. 


B 

Babson  and  May,  501,  n. 
Backwardation,  146. 
Bagehot,  W.,  18,  37,  540,  n.,  580. 
Baker,  G.  F.,  518,  519,  n. 
Balances,  required  by  banks,  173, 

377- 

Balance  of  trade,  320,  551. 

Baldwin,  J.  M.,  18,  37. 

Balkan  Crisis,  hoarding  of  bank- 
notes in  Austria  in,  140,  n. 

Banks.  See  Engl  .sn,  Bank  of, 
State  Banks,  Private  Banks, 
ETC.  As  b<»k-keupers  for  busi- 
ness, 365;  correspijndent  rela- 
tions of,  355,  n.;  bank  capital, 
489,  491,  524;  bank-credit,  Ch. 
IX,  26i,484fr.,  489-97,  Ch.  XXIV; 
elasticity  of ,  129, 183,  216,  281-88, 
299,  320;  relation  of,  to  trade, 
26off.,  281.  See  Trade.  Func- 
tions of,  484-80,  492-95.  See 
Credit,  Functions  of.  Tech- 
nique of,  489-97,  Ch.  XXIV; 
bank-drafts,  355-58, 367;  on  New 


594 


INDEX 


■     > 

I 


York  and  other  centers,  ,156-58; 
bank-notes,  i2q,  139,  n.,  289, 
322-23,  447.  448-  47^.  473.  487. 
495,496,  511,  530,  539;  as  "cap- 
ital," 261,  484-88;  elasticity  of, 
129,  298,  448. 
HankinR   Sch(X)l,    283IT.,  395.     See 

("I'RRENCY  SciKK)!.. 

Banker  as  centre  of  power,  32,  466, 
484IT.,  577,  583. 

Banker's  psychology,  141,  304. 

Barbour,  David,  154,  218,  n. 

Barnett,  G.  E.,  347,  n. 

Barter,  99,  icx),  130,  133,  Ch.  XI, 
220,  226,  265,  369,  394,  404-07, 
419-21,  493.  536;  highly  impor- 
tant in  modern  life,  Ch.  XI,  394; 
made  easier  by  money  as  a  meas- 
ure of  values,  201,  394,  421; 
intellectual  dilTiculties  of,  418- 
20;  physical  difficulties  of,  423. 

Bastiat,  F.,  532. 

Bears.      See    Bulls    and    Bears. 

"Bearer  of  options"  function  of 
money,  148,  201,  314,  n.,  418, 
424-32,  436,  442,  45 1,  495,  536, 
543;  distinguished  from  store  of 
value,  425;  dynamic  function  of 
money  par  excellence,  426,  495, 
536;  reserve  function  a  special 
case  of,  426,  n.,  536ff. 

Belsium,   National    Bank   of,    182. 

Belief,  as  element  in  values,  40, 136, 
462-08,  486fT.,  574-75;  relation  of, 
to  credit,  262,  n.,  462-68,  486fl., 
581.    See  Credit. 

Bendi.xen,  F.,  435,  n. 

Bergson,  H.,  579,  n. 

Bilgram,  H.,  3,  n. 

Bills  of  exchange,  167,  181-82,  201, 
254-55.  288-QO,  369,  444,  490-91. 
530;  si)eculation  in,  254-55,  514, 
515,  n.;  as  reserves,  181-82,  444, 
530.  See  also  Foreign  Bills, 
AND  Gold  Moveme.vts,  Inter- 
national. 

Bimetallism,  219,  n.,  221;  not 
logically  related  to  quantity 
theory,  219,  n. 


Biological  factors  in  social  life,  571- 

73.  590. 
Bdhm-Hawerk,  K.  von,  9,  n.,  44,  48, 

51,70,  78.  n.,  91. 94.96,  n.,  113,  n., 

146,  n.,  301,  n.,  303,  n.,  437,  563, 

n. 
Bonds,  as  bearers  of  options,  147- 

48,  425,  428;  listed,  sold  "over  the 
counter,"  250,  514;  bonds  sold  on 
Stock  Kxchange,  not  "cleared," 
370;  held  by  banks.  See  Assets 
OF  Banks.  "One  house  bond," 
147. 

B<x)k-credit.  See  Credit. 
"Borrowing    and    carr>ing,"      See 

Stocks. 
Bosanquet,  B.,  18,  n. 
Boston,  289,  n.,  354,  368,  429,  n., 

503. 
Brassage,  450. 
Brokers,  168,  199,  235,  287,  n.,  367- 

68,  371,  372,  374-79,  409,  496-97. 

429,  n.,  521,  n.,  531,575- 
Brown,  H.  G.,  301,  n. 
Business,  speculation  in,  252!!. 
"Business  capital"  w.  capital-goods, 

482,  484!!.,  560-61,  569,  580-82. 

See  also  "Good  Will,"  Statics, 

Dynamics,  Friction,  etc. 
Business  confidence,  40-41,  97,  118, 

185,  210-11,  214,  463-68,  530-31. 

536,  574-75.  577- 
Business  cycle,  187-89,  254.  .S48- 

49,  555,  573-75- 
"Business  distrust,"  426,  427,  n. 
Business  man  vs.  economist,  as  value 

theorist,  573-78- 
Bulls  and  bears,  145,  371-73,  4o6, 

471-72,  522,  576,  579. 
"Buying  price"  vs.  ".selling  price," 

402-04,  406-07,  476, 


Cairnes,  J.  E.,  47,  50,  55,  n.,  57-59, 
62,  64,  67-69,   220,  n.,  428,  n. 

Call  loans,  73,  n.,  375-78.  382,  425, 
428(T.;  as  "bearers  of  options," 
42s,  428f!. 


INDEX 


59S 


Call  rates,  why  low,  428ff.  See 
Money  Kates,  Interest. 

Canada,  216,  284,  n.,  448,  450. 

Cannon,  J.  G.,  347,  n. 

Capital,  Ch.  IV,  98-99,  220,  222-23, 
408, 410, 42s,  429, 461,  484ffM  526, 
SSI,  n.,  560-62,  564-66,  569-70, 
580-82;  circulating  vs.  fixed,  526. 

Capital    goods.     See    Gooos,    In- 

STRirMENTAL. 

Capitalist,  264. 

Capitalization  theory,  Ch.  IV,  260, 
297,  30ofT.,  316,  318,  389,  416,  n., 
436-42,  459-60,  494,  562-64,  57s; 
assumes  "banker's  psychology," 
305-06;  assumes  fixed  absolute 
value  of  money,  76ff.,  313-14, 
389,  438;  linutations  of,  305-06, 
316-17,  481,  n.,  562,  n.;  applied 
to  value  of  money,  Ch.  IV,  iir, 
424,  436-42,  456;  conflicts  with 
quantity  theory,  30ofl.,  310-11, 
389.  See  also  Interest,  Capital, 
Re.vt. 

Capital  value,  Ch.  IV,  149,  224, 
318-19,  402,  424,  436ff.,  4S2.  459- 

Carey,  H.  C,  106. 

Carlile,  W.  VV.,  37,  n.,  397, 400, 407, 
411,  n. 

Carver,  T.  N.,  4,  n.,  419,  n.,  543,  n., 

.S73.  n. 

Causation,  142-43,  190,  204,  224, 
279.  292,  312,  315,  336,  403, 
433.  n.,  437,  438,  454,  548;  ex- 
hibited by  change,   190,  454-55- 

Causal  theory  of  value,  i4ff.,  9off., 
96,  114,  n.,  163,  165-66,  176-77, 
186,  192,  204,  296,  Ch.  XV,  310, 
336,  400-01,  433,  n.,  437-38- 

Cause,  a  definition  as,  143,  400-01. 

Checks,  167,  168,  184,  281,  339flF., 
354ff.,  364-81,  499;  "accommoda- 
tion checks,"  243;  certified,  200, 
322,  349,  370,  376;  cashier's,  349; 
collection  of,  354fF.;  proportions  of 
checks  and  money  in  payments, 

174.  338.  447.  449.  463. 
Checking   accounts,    173-74.     See 
DEPOsrrs. 


Chen-Huang-Chang,  407,  n. 

Chicago,  246,  259,  289,  n.,  354.  379" 
80,  503,  542;  chief  centre  for 
check  collections,  354;  Board  of 
Trade,  252-52,  268,  327,  379-80, 
503,  542;  Board  of  Trade  clearing 
house,  369,  379-80. 

Circular  reasoning  in  value  theory, 
15,  88,  89,  92,  100-01,  lOS,  112, 
113,  115,  U7,  132,  13s,  143,  379. 
438,  452. 

Clark,  J.  B.,  12-13,  48,  96,  n.,  264, 
n.,  439,  n.,  440,  n.,  554-55- 

Clark's  Law,  439. 

Clark,  J.  M.,  3,  n.,  11,  n.,  14,  n., 
98,  n.,  413,  n. 

Classical  School,  69.  See  Cost  of 
Production,  Caisnes,  Senior, 
RicARDo,  Jas.  Mill,  J.  S.  Mill, 
Labor  Theory  op  Value,  etc. 

Clearing  houses  in  speculative  ex- 
changes.   See  Stock  Exchange. 

Clearing  houses,  bank.  Sec  Clear- 
ings. New  York  Clearing  House, 
346,  354;  New  York  Clearing- 
House  banks,  179,  344. 

Clearings,  200,  237-41,  345-46,  378, 
392;  as  index  of  "ordinary  trade," 
240-41,  516;  as  index  of  specula- 
tion, 237flf.,  378,  392,  516;  in  New 
York  City,  237-41,  339,  341-42, 
345-47,  357-59.  360,  516;  of  New 
York  City  trust  companies,  345- 
47;  outside  New  York  City,  239- 

41,  339,  340,  342,  348-53,  357-59, 
516,  n.;  ratio  of,  to  "deposits," 
341-42,  348-59-  5«6,  n.;  ratio  of, 
to  "total  transactions,"  348-51, 

353,  359,  n. 

Clow,  F.  R.,  135,  n.,  144,  n. 

Cob,  139,  n.,  167,  443-50;  coinage, 
443-50;  statistics  of,  412,  n. 

Collateral  loans,  461,  462,  463,  493, 
494,  497,  502-06,  513,  523-26; 
percentages  of,  on  stocks  and 
bonds,  and  on  "other  collateral 
security,"  502-09;  on  "other 
collateral     security"     analyzed, 

S02flf. 


596 


INDEX 


Collection  of  out  of  town  checks, 
354-55.   See  Checks. 

Commerce.    See  Trade. 

Commercial  banks,  357,  488,  4Q0, 
498-99.  5 19-20.  523-29;  financing 
commerce  no  longer  the  chief 
function    of,    Ch.    XXIV,    esp. 

Commercial  cities,  outgrow  manu- 
facturing cities,  359. 

"Commercial  paper,"  ^31,  457.  49°. 
496-97,498-520. 

Commercial  and  Financial  Chronicle, 
272. 

Commodity  theory  (Metallist  theory, 
Bullionist  theory),  81,  85,  129, 
13s,  144,  151-53.  330.  390.  391. 
435,  n.;  hypothetical  case  illus- 
trating. 151-53.  327-28,  390,  421; 
contrasted  with  quantity  theory, 

JSi-53- 

Competitive  di^lay,  relation  of,  to 
value,  410-11,  438-42.  452. 

Cor^nt,  C.  A.,  73,  n.,  182,  n.,  323, 
n.,  347,  n.,  412,  n.,  418,  n.,  428, 
n.,  502,  510,  n.,  512,  n.,  535,  n. 

Conant,  L.  Jr.,  252,  n. 

Concatenation  of  values  and  prices. 
See  VAnra:.s,  Prices. 

Consols,  470. 

Contango,  145. 

Cooley,  C.  H.,  3,  4,  n.,  19,  21,  n., 
30,  37,  484,  n. 

Corporations.  See  Stocks,  Bonds, 
Stock  Exchange.  Consolida- 
tions of,  198-258,  3'  (1-67;  lead  to 
duplications  of  "deposits,"  366- 
67;  corporation  finance,  198-99, 
201,  n.  3,  432,  460-61,  476-77; 
corporation  securities  as  credit 
instruments,  460-61, 476-77. 492- 

93.  527. 

Correlation,  coefficient  of,  237,  237, 
n. 

Cost  of  production,  Ch.  Ill,  193, 
221,  n.,  257ff.,  29s,  300,  306-07, 
309,  n.,  389,  562,  n.,  565-66; 
inapplicable  to  value  of  money, 
Ch.  Ill,  389,  451;  relation  of,  to 


supply  and  demand,  50,  Ch. 
not  related  to  quantity  th 
46fT.;  conflicts  with  qua 
theory,  300,  306-07,  310-11, 
assumes  fixed  absolute  vali 
money,  Ch.  Ill,  313-14.  389. 
"real  costs,"  44-4S.  64ff., 
117,  n.  See  Labor  Theor 
Value.  Money  costs,  Ch. 
90,  95;  Austrian  cost  theorj 
Ch.  Ill,  90,  95,  116,  n.  Set 
Selling  Costs. 
Cotton  speculation.  See  New  ^ 
Cotton  P^xchange,  and  Si 

LATION. 

Credit,  42,  98-99.  130.  M 
i66ff.,  Ch.  IX,  Ch.  XIII, 
XIV,  318,  Ch.  XVIII,  39 
395,  427,  441,  447.  Ch.  X; 
Ch,  XXIV,  581;  not  base 
money,  326-27;  based  on  v; 
326-27,  478-86,  485-86,  52 
part  of  general  system  of  vj 
40-41,  460,  462-68,  480,  i 
574-75;  definition  of,  45 
472-74,  489;  distinguished 
credit  transaction,  473;  jui 
aspects  of,  395,  460-61,  46 
relation  of,  to  belief.  See  Bi 
Functions  of,  263-66,  3? 
395.  407,  441.  475-78.  484ff-i 
12,  523-29;  relation  of,  to  ni 
Ch.  IX,  Ch.  XVIII,  393, 
See  also  Reserves.  Relati 
to  trade,  Ch.  XIII,  Ch.  XIV 
92,  393;  volume  of,  a  funct 
dynamic  change,  474;  e 
See  Bank  Credit.  As"cai 
261,  461,  484S.;  in  "equal 
exchange,"  i66fl.;  book-< 
1678.,  226,  369;  time-credit 
See  Loans,  Interest.  Se 
Bank-Credit,  Deposits,  I 
Collateral  Loans,  Call  I 
Assets  of  Banks,  Belief, 
NESS  Confidence,  etc. 

Credit  Lyunnais,  530,  n. 

Credit  theory  of  paper  money 
Paper  Money  and  Greeni 


INDEX 


597 


I,  so,  Ch.  in; 
intity  theory, 
ith    quantity 

,  310-1I1  389; 
)lute  value  of 

1-14,389.451; 
tS,  64ff.,  96, 
R  Theory  of 
osts,  Ch.  Ill, 
)st  theory,  56, 
b,  n.    See  also 

see  New  York 
!,  AND  Specu- 

130,    143-44. 
:h.  XIII,  Ch. 

VIII,  392-93. 

,  Ch.  XXIII, 
not  baaed  on 
aed  on  values, 
JS-86,  528-29; 
tern  of  values, 
8,  480,  486fT., 
of,  459-60, 
nguished  from 
473;  juridical 
5o-6i,  468-73; 
f.  See  Belief. 
3-66,  391-92. 
78,4848-.  5"- 
1  of,  to  money, 

ni,  393.  395- 
>.  Relation  of, 
Ch.  XIV,  391- 
l,  a  function  of 

474;    elastic. 

As  "capital," 
a  "equation  of 
;  book-credit, 
ime-credit,  168. 
tEST.  See  also 
iposrrs.  Loans, 
s.  Call  Loans, 
,  Belief,  Busi- 

,  ETC. 

,  n. 

ler  money.    See 

d  Greenbacks. 


Crises,  213.  254,  520,  548-49.  555- 
See  Panics,  Business  Cycles, 
Business  Confide.nce,  Theory 
OK  Prosperity. 

Cross-section  analysis.  Sec  His- 
torical vi.  Cross-section  View- 
points. 

Curb,  250. 

Currency  School,  283ff.,  395;  cur- 
rency theory  «if  deiJosits,"    283. 

Curves  applied  to  money,  45 '-53- 
See  Marginal  .\nalysis. 

Custom,  36,  109,  13s.  M6,  i83-»4. 
205«T.,39i,405,  562,n.,s89-  See 
Habit. 


Davenport,  H.  J.,   12,  n.,  14,  "-. 
21,  n.,  25,  65,  n.,  67,  78,  n.,  80, 
91,  n.,  94.  103.  "-.    113-15.    "-. 
218,  n.,  314,  418,  n.,  419.  n-.  426, 
n.,  429.  n.,  434.  447.  n.,  482,  n. 
Davidson,  T.,  18,  n. 
Dean,  Rodney,  354.  n. 
Debtor  Class,  139. 
Debts,    433.    "•    ff-.   472-75.   489; 

repudiation  of,  581. 
DeCoppet  and  Doremus,  249,  370. 
Definition,  a,  as  cause  for  the  circu- 
lation of  money,  143,  400-01. 
DeLaunay,  L.,  412,  n.,  415.  "• 
Demand.     See   Supply   and   De- 
mand.   Increase  of,  53;  nominal 
increase  of,  54;  elasticity  of,  55, 
224-27,   411-13;   for   money,   in 
what  sense  used,  62;  elasticity  of, 
224-27;  demand  curves,  51;  ap- 
plied to  ^old,  45 iff-;  social  ^*1"^ 
explanation  of,  42,  Ch.  II,  93; 
distinguished  from  utility  curves, 
49,  S2,  70, 80, 113,  n.,  115.  n,  n6. 
"Demand  Notes,"  322,  448,  n. 
Deposits,  129, 143.  Ch.  IX,  186,  296, 
344.  345-47, 453,  472,  487;  by  one 
bank  in  another,  358,  n.,  349.  355. 
n.,  357.  365.  n-,  367.  n.,  500,  n., 
508,  515,  n.,  530-32;  relations  of, 
to"  money  in  circulation,"  Ch.  IX, 
185,  294;  relation  of,  to  reserves. 


Ch.  IX,  286-87,  298-99;  activity 
of,  345-47,   5 « 2-16;  in   Europe, 
262.      See    t;iRO-SYSTEii.      De- 
|)osits  as  "bearers  of  options," 
425;  relation  of,  to  loans,  285lf., 
512;   relation   of,   to   trade  and 
prices,  Ch.  XIII.  Ch.  XIV,  287; 
of  private  banks,   344;  deposits 
distinguished    from    "deposits," 
339,  n.,  343-44.  5«2;  relation  of, 
to  "deposits,"  512(1. 
"Deposits"  in  Kinley's  studies  of 
payments,  230,   232-36,   242-43, 
338ff.,  392,  512-16;  retail  "de- 
iwsits,"  232,  243.  269, 338, 367.  n., 
368,    392,    S13;    wholesale    "de- 
posits," 232,  243.  338,  392,  513: 
"all  other  deposits,"  232,  235-37. 
243.    338,    514;    relaUon   of,    to 
trade,  230,  243-45.  248,  339-40. 
See  Overcounting  and  Under- 
counting.    New  York  City,  233, 
234,    242,    246,    34off.;   country, 
246;  in  Pittsburg,  245-46;  check 
"deposits,"  volume  of,  339,  360- 
62,  392. 
Deutsche  Bank,  530,  n. 
Dewey,  John,  17,  n.,  22,  579,  n. 
Dibblee,  G.  B.,  259-60. 
Differential  principle,  and  theory  of 
rent,  439-41 ;  applied  to  money, 
439-41,  529. 
Director  of  the  Mint,  staUstics  of 

gold  consumption,  513,  n. 
Discount.    See  Time-discount  and 
Capitalization  Theory;  rate  of, 
see  Interest;  rate  of,  vs.  money 
rates,  see  Interest;  on  Green- 
backs,   see    Greenbacks,    Pre- 
Hiuu,  Agio. 
"Discounting,"  298,  597. 
Distribution  of  wealth,  15,  31,  33. 
37,  38,  97,  102-03,  246,  247.  n., 
413-16,  465-67.    See  also  Inter- 
est,   Capital,    Capitalization 
Theory,     Rent,      Imputation 
Theory. 
Division     of     labor     in     bankuig, 
America     and     Germany     con- 


59S 


INDEX 


iratieit  ,  .7;  extent  d  In  Kflnlaml, 

UiHi<i-H<.rit!i,  »i,  C"*    VII.  155,  i80i 

^o4,  ;-'».  W5- 

"  Dollar  exi  hun«i','    541 

"r)<)m«s«h  trwle"  ia.  fon-wn  trade, 
a|>!<«idix  t"  ('li.  XIFI  Stc 
Tr/V»;. 

l>(iuWc  I  antinK  in  istimatinK 
volume  '»!  trade  Sue  Over- 
I  fd'NTiM;. 

I)via.lism,  most  imt'i'iil  metaph;.  iics 
tor  staial  scicnl:e^.  5  7 1-7  J. 

Dun's  Kn-irw,  2:2.  n.,  .'7,^  "• 

Dynamics,  42,  'o().  i7^>  "  •  ^"h.  X, 
.'S4,  26?-f><).  ,4<)2-<).<.  .^o.S-<)'>,  42f't 
474,  4ta-S«.  4«5.  5-r-28,  Ch. 
XXV;  (nmarnks  and  status,  rcc- 
onciliat^si  '>t.  42,  <05-t)<',  Ch. 
XXV:  -i\iTamic  credit,"  484-89. 
See  Tffitj««TTioN  !»brioi)s.  Pros- 
PKwn.  TiiKORY  "K,  Statics, 
"ISORMAL,"  I'riction,  Fi.iiniTY, 
I.iQi-inrrv,    "'M-eability,    Kyri- 

LlBRItM,    BtSIVESS   (  APITAL,   Is- 

TAXGIBU-:  Capital,  etc. 


Elasticity.  Sec  Demand,  Elastic- 
ity oi',  AM)  Hank-credit,  Llas- 

TICITY  OI'. 

i;llw(MxJ,  C.  .\.,  4.  n.,  -M,  n. 

Emery,  H.  C,  140.  n.,  oTL  "•.  ST^,  "• 

Ens,'iand,  142,  184,  447-48.  450,  530, 
534,  5,^f'-43-  Sec  Londov,  and 
Liverpool.  Bank  of  Encland, 
183,310,  323.  350.  S38fT.;  "Bank 
Restriction"  in,  333.  n. 

English  School,  96.  Sec  Classical 
School. 

Entrepreneur,  67,  48sff.,  539.  S83- 

8.S. 
"Epi-phenomenon,"  money  as,  266. 
"  Equation  of  Exchange,"  Ch.  VIII, 

186,  188,  191,  204,  -'8.?,  Ch.  XV, 

326,  3^3.  520-23,  527,  n-  S2S,  n.; 

as    equation    of    -values."    159; 

mathematical  analysis  of,  158-66; 

factors  in,  highly  abstract,  162-63, 


176-77;  ''equatitw  of  exch»n(?e" 
vs.  causal  theory,  I'M,  r(is  66, 
186,  i8<),  11.  Stc  Calsal  Theory 
Of  Vau  K.  Statisticsof,  Ch.  XIX. 
SecQi'wTiTY  Thkoky,  Deposits, 
Vel'kity,  'I'hade,  \'i»luiie  ok, 
1'rk  k  level,  et<. 

tvpiaiion  of  supply  an<l  demand,  51. 
Sec  Si  ppLV  AM)  Demand. 

Equilibrium,  91IT.,  105,  115,  n.,  116, 
117,  119,  IS'-,  "87,  190,  22J,  225. 
2S4.  262-<i6,  293,  298-99,  328, 
A.i.i'  n-i  .?<)2-93,  401.  451-57.  557, 
570-73.  S«3.  586-89. 

Eurojjean  BankinR,  2<)2,  497.  5". 
5 -•3.  S'-r,  530-  ^■^'  Kn(;land, 
I.ermvny,     France,     .\istria- 

HlJNCARY,  BELC.HM,  etc. 

E.xchange,  9-11,  133.  224!!.,  3981!., 
4()8-<H),  520-23;  creates m/wfi,  not 
utilities.  III,  n.,  14s,  423-24.  424. 
n.;  in  static  state,  262-^10,  401-0;; 
relation  of,  to  value,  o-n,  401  IT., 
468-69.  See  Trade,  (  Jold  Move- 
ments, Intern.xtional.  etc. 

E.xchangeability.    Sec  Saleability. 


Fashion.    See  Suggestion. 

Federal  C.overnment,  147,  322,  332, 

368, 432. 476,  549;  Federal  war  tax 

as  index  of  grain  sjieculation,  251. 

Federal  Reserve  System,  299.  490, 

499,    518-20;    should    rediscount 

stock    collateral    loans,    5 18- jo; 

"money  trust"  and,  518-20. 

Fetter,  F.  A.,  7.  "•.  48,  "8.  n.,  301, 

n.,  303,  n.,  437.  440,  n.,  562,  n. 

Fiat   thcH)ry,    136,    142.     See   also 

Legal  Thei  iry,  Staalliche  Theorie. 

Fichte,  J.  C,  22,  137. 

Fisher,  I.,  47,  36,  81.  91,  n.,  99,  117. 

n.,  124,  128,  130,  143,  152,  i54ff-. 

i72fT.,  i86ff.,  196,  200,  n.,  203ff., 

209fT.,    2i'>tT.,    222,    226-29,    231, 

240,  -M?,  248,  n.,  254,  256,  261, 

262,   -•*/4,   28ifT.,   291;".,  301,  n., 

302-04,  30^',  308,  311,  312.  3241 

326,  331,  iii<  "•.  33Sff-.  348-49, 


s 


INDEX 


S99 


351-52,  36o6f..  .^71,  376.  jSt-ft). 
400,  437.  4SS.  5i-'  i-J'-  SS5.  55'». 

Fitc.  W.,  2  1,  n. 

Fluidity,  i43.  403i  45''.  47'>.  i4i. 
56^,  n.  See  also  Kujiiurrv, 
Saleabilitv,     Static     rnKoHV, 

ETC. 

Flux,  \V.  A..  40- 

FortiKn  bills  of  txchangc,  in  re- 
serves,   i«i-8j.      Sec    H1LI.S    OK 

KxCHANdK     AMI      (ioLI)      MoVK- 
MKNTS,    ISTERNATIONAI.. 

ForeiRn  trade,  2O1,  ;f)5.  soj;  ratio 
of,  to  "domestic  trade,"  apiiendix 
to  Ch.  \iri.    See   Tradk,  Biu.s 

OF  KXCHANGE,  (iOLD  MoVKMENTS, 

International. 
France,  156,  139.  "•>  4.1°.  .S30i  "•> 
S33,Battquedc,  1.5O,  183,4^51 53*" 

3Q- 
Friction,  11,  94.  J')2-<><».  39^.  4^"i 

543-44,    554-55.    S"3-     See   also 

Statics,  Dynamics,  Sai.kabilitv 
Functions  of  money,  7O,  81,  83,  03- 

94,  iio-ii,  144-48,  151-53.  -201. 

263-66,  3>3-i4.  3J7-2S,  390-91. 

3Q4,  399.  Ch.  XXII,  536ff->  543; 

in  relation  to   \alue  of  money, 

I44fif., 390-01,  3(w-400,Ch.  XXII. 
Functions  of   value.     See   Vali  e, 

FUNCTION.S  OF. 

"Futures,"  243,  .\=n.  See  Stocks, 
"  Borrowing  and  C  \rrving"  of. 

Future  values,  40,  107,  459-6c,  480, 
486,  585.  See  Credit,  Part  of 
General  System  of  Values. 

Futurity,  not  peculiar  to  credit, 
459-60,  475. 

G 

George,  Henry,  78,  n.,  301,  n. 

Germany,  136,  139.  n-.  145-46,  16/1 
425.  433.  n.,  433.  "-.  527,  53°.  "•; 
giro-system  in,  150.  ity,  289; 
great  use  of  domestic  bills  of  ex- 
change in,  28S-OV,  iimitca  an  I 
sion  of  labor  in  bankinij  in,  527; 
Reichsbank,  182,  183. 


i;iddings,  F.  H.,  87,  n.,  ss^-S?,  57'.  , 

i73.  n. 
(liro-system.    See  (IermasV. 
{;ol<l,  84,  143,  t'h.  XXI,  422,  432. 

43'.,  441-43.  443  44.  n..  s.io,  535- 

56.  538-39. 567,  59';  '"  ''f's.  84. 

13s.   '5'    53.   224,  3'4.  3.?o.  390. 
400,  t'h.  XXI,  45 '-57;  :is  money. 
84,  135,  141.  '46,  224,  304.  iii 
23,  390,  408-10,  441-43,  445,  45' 

57.  495-96,  530,  535-5''.  538-39; 
value  of,  84.  th.  XXI,  esp.  408 
16,  451-57;  '•!  reserves,  147,  180- 
81,324-28. 

Gold  mining  camps,  high  i)riccs  in, 

220,  n. 

Gold  movements,  inlernaticmal,  6&- 
61,  I2q,  142,  181-82,  183,  2(.l, 
280,  2()2,  t'h.  XVI,  434,  n.,  531, 

533-U-  .  ,, 

Gold  priwluclion  and  prices,  l,h. 
XVIII,  535  36;  new  world  dis- 
coveries, 2i()lT.;  ("alifornian  and 
.\ustralian    discoveries,     220-21, 

221,  n. 

(JimmIs,  consumers',  34ff-.  82, 96,  481 ; 
ranks  or  orders  of.    See  Ranks. 
Instrumental,   38,   81,    297,   482. 
484.  500,  sfMj,  579. 
"G(Hxls  side"  of  "equation  of  ex- 
change," no,  159. 
"GfKKl  will,"  2()0,  482-S3,  561.  564- 
See  Business  Capitai,,  Intangi- 
ble Capital,  Selling  Costs,  etc. 
Grain   speculaticm.     See   Specula- 
tion, Commodity. 
Greenbacks,  141,  i.v6,  147.  '94.  304, 
i22-2i,    T,32-ii,   422,   432,    435. 
436,  567-68. 
Gresham's  Law,  129,  140,  n.,  <-h. 
XVII;    conflicts    with    quantity 
theory,  Ch.  XVII;  quantity  the- 
ory version  of,  321-22. 

H 

Habit,  104,  109,  138,  225    554-33. 

jSy.    Sec  .",!so  Ci:kt'.>m. 
Iladley,  .\.  T.,  157- 
Haig,  R.  M.,  552,  n. 


m 

■11 
W 

m 


m- 


W- 


it,rf' 


f 


^h 


600 


INDEX 


"  mburg,  coffee  speculation  in,  252; 

Jiro-Bank,  150. 
Hancy,  L.  H.,  3,  n. 
Harvey,  "Coin,"  327. 
Havre,  coffee  speculation  in,   252. 
"Hedging,"  243,  253,  264. 
Hegel,  G.  W.  F.,  18,  n. 
Helfferich,  Karl,  14,  82,  n.,  no,  n., 

134,  418,  n.,  419,  n. 
Heredity,  S7i-7,?- 
Hermann,  F.  B.  \V.  von,  438,  n. 
History,  economic  intcrjiretation  of, 

33- 

Historical  vs.  cross-section  view- 
points, loiff.,  iiQ-20,  135-39, 
397-400,  548,  S.S3-54.  578-81. 
See  also  Statics,  Dynamics. 

Hoarding,  140,  n.,  174,  207,  208,  211, 
333<  n. 

Hobstin,  J.  A.,  73,  n.,  308,  n. 

Hollander,  J.  H.,  154,  250,  n. 

Holmes,  justice  O.  \V.,  24,  587- 
90. 

Holt,  Byron  W.,  222,  249,  370. 

Hubbard,  Guy  C,  260,  n. 

Hughes  Commission,  252,  n. 

Hume,  David,  21,  47. 


Ideal  credit  economy,  543. 

Ideal  values,  467,  480. 

Imitation.   See  Suggestion. 

Imputation  theory,  28,  38-40,  99, 
300,  389,  424,  481;  conflicts  with 
quantity  theory,  300,  303-04, 
310-11,389. 

Income,  money.  See  Money  In- 
come. 

Income,  net,  of  the  United  States, 
appendix  to  Ch.  XIII. 

Index  numbers,  of  check  circula- 
tion, 361-62,  383;  of  net  income  of 
the  United  States,  278;  of  prices, 
278,  381-82,  383,  436;  of  railway 
gross  receipts,  278;  of  trade,  227- 
-!9,  255-56,  278,  363.  .?8i,  383. 
Set  Statistics. 

India,  140,  143,  149,  181,  443,  444i 


n.,  449;  a  liability,  rather  than  an 
asset,  to  quantity  theory,  444,  n. 

Indi-'idual  interest  and  social  ad- 
vantage, 397-99- 

Individual  values,  19,  43-45.  See 
also   Value,    Sl3jective,    Per- 

SONAI.,     SUBJECmVE     FlXCHANGE. 

Individualistic  theories,  14-16,  20, 

21,   22ff. 

Individuality,  a  social  product,  16- 
19. 

Industry,  rather  than  commerce, 
chiefly  financed  by  modern  banks, 
Ch.  XXIV,  esp.  523-29.  See 
.Assets  of  Banks,  Bank  Credit, 
Functions  of. 

Inertia.    See  Habit,  Custom. 

Institutional  values,  29-30,  413, 
484. 

Institutions,  19,  27,  484,  487,  562, 
n.,  570. 

Insurance  policies  as  credit  instru- 
ments, 472. 

Intangible  "capital"  vs.  capital 
goods,  482-83,  Ch.  XXV.  See 
also  Good  Will.  Buslvess  Cap- 
ital, ETC. 

Interest,  146,  219,  223-24,  225, 
3oiff.,  333,  n-.  416,  n.,  428-3  r 
437.  471,  472;  "appreciation 
and,"  76-78;  productivity  theory 
of,  224,  302-03,  437;  "use" 
theory  of,  437,  438,  n.;  "pure 
rate"  of,  75,  76,  77,  428-29;  vs. 
"money  rates,"  Ch.  IV,  224,  428- 
32,  461,  521,  n.,  523-24,  526,  529. 
See  also  Money  Rates,  Call 
Kates,  Capitxlization,  Time 
Discount. 

International  banker,  409, 446,  539ff. 
See  Gold  Movements,  Interna- 
tional. 

Internationa!  trade.  See  Foreign 
Trade. 

Investment,  270,  S23ff.,  528;  vs. 
s|)tTulation,  521,  n.,  523-26; 
hanker,  489,  519,  523,  n.,  ^27-28. 

"Invisible  items"  in  foreign  tnidc, 
268,  270,  320. 


INDEX 


6oi 


J 

James,  William,  579,  n. 

Jenks,  J.  \V.,  260,  n. 

Jevons,  W.  S.,  25,  48,  01,  n.,  107, 

522,  n. 
Jewelers,  409,  454-571  puper  ol,  in 

the  money  market,  454-57- 
Johnson,  A.  S.,  4,  n.,  13,  105,  115, 

n.,  265,  n.,  403,  n.,  440,  n.,  563,  n. 
Johnson,  J.  F.,  73,  n.,  as,  n.,  418,  n. 
Joint  Stock  Banks,   184,  530,  539- 

See  London,  Knc.land. 
Jurisprudence,     23-24,    588.      See 

Law,  Legal  Values. 
Juristic  thinking,  24-25,  29,  433,  n., 

586-88;  contrasted  with  economic 

thinking,  433,  n. 

K 

Kant,  L,  22,  137. 

Kemmerer,  I'..  \V.,  48,  129, 135, 140, 
141,  15O,  157,  167,  170,  175,  n., 
220,  n.,  22O,  240,  n.,  254,  256,  274, 
312,  n.,  321,  334-37.  359.  n.,  3bi, 
n.,  3('3-65.  3S1-83,  4C  j,  426,  n., 
443,  n.,  444,  n.,  522,  n.,  537,  538, 
n. 
Keynes,  J.  M.,  180,  181,  182,  n., 
184,  207,  443,  n.,  S3S. 

King,  VV.  L,  242,  243,  246,  n.,  247, 
n.,  248,  n.,  2()9,  271-72,  275,  n. 

Kinley,  1).,  13,  48,  78,  n.,  80,  1  lo- 
II,  174,  208,  n.,  230,  233-36,  237, 
n.,  242-45,  249,  254.  25b,  269, 321, 
337-45.  349.  350-52.  i<^>  365.  n., 
368,  376,  383,  n.,  419,  n-.  447.  449, 
463,  498,  n..  512-15- 

Kirkbride  and  Sterret,  347,  n. 

"Kiting,"  368. 

Knapp,  G.  F.,  49,  150,  418,  n.,  433- 
5.  n. 

Knies,  Carl,  12,  133,  323,  n.,  418,  n., 
419,  n. 

Kuhn,  Loeb  &  Co.,  343-44.  5«5. 
515.  n- 

L 

Labor  thcor>-  of  value,  12.  44-45. 
64fif.,  139.  S/O.    See  Valle,  Cost 


OF  Production,  Adam  Smith, 
RirAU)0,  Marx,  Cairnes. 

Land  speculation,  254, 264, 317.  See 
Speculation. 

Laughlin,  J.  L.,  48,  135,  141,  i44, 
146,  177,  219,  n.,  281,  282,  n., 
283,  n.,  284,  3".  n-.  3«9.  n.,  3*7, 
n.,  418.  n.,  419,  n.,  443,  n.,  444. 

n.,  459- 
Law,    theories    of,    23fr.,    586-89; 
statics  and  dynamics  of,  586-88. 
LeBon,  G.,  37. 

Legal  tender,  147,  418,  422,  432-36, 
442,  445-47,  448.  n.    See  I    no- 
tions OF  Money. 
Legal  theory  of  money,  134.   136. 
405,    433n.,    ff.      See    Slaalliche 
Tkeoric. 
Legal  thinking.  See  Juristic  Think- 
ing. 
Legal    values,    23-29,    40,    138-39, 
413,  414,  435.  n.,  562,  n.,  586-89. 
Lewes,  G.  H.,  87,  n. 
Liabilities  of  banks,  285;  relation  of, 
to   loans,    286.     See    Deposits, 
Bank-notes,  etc. 
Liquid  paper,  455,  489-91,  499ff-, 

S13-18. 
Liquidity,  455,  475.  489,  495,  499ii-. 
508,     5'3-i8,     526-27,     529-44- 
See  Saleabiuty,  Statics,  Fric- 
tion. 
Liverpool,  252,  259. 
Loans,  on  call.    See  Call  Loans. 
On  cotton,  481,  504,  508,  n.;  on 
grain,  380,  503,  508,  n.;  to  stock 
market,  375^-,  379.  'i-,  430.  488, 
502-03,  507-12,  518-20,  523-28: 
to  wholesalers  and  retailers,  504- 
05;  consumption,  463;  war,  see 
War  Loans.  Collatera'  see  Col- 
lateral Loans.  Activity  of,  5 1 2- 
14;  relation  of,  to  deposits,  285(1.; 
relation  of,  to  "deposits,"  375-81, 
512-14;  relation  of,  to  trade,  287, 
287,  n.;  relation  of,  to  interna- 
tional gold  movements,  318-19; 
short  U«ns  a.s  bearers  of  option*, 
425,  428-32.    Sec  also  Assets  uf 


6o2 


INDEX 


111 


Banks,  "CoMMERCiAr.  Paper," 
"MoRMNG   Loans,"  ''Overcer- 

TIKICATIONS." 

i.iHkf,  John,  47. 

London,  145,  251,  250,  259,  n.,  4Q7, 
522,  n..,v^g(T.;  stock  i'xchan(;e,4Si; 
monuy  market,  illustrates  assumiJ- 
tions  of  static  theory,  5ig(l. 

M 

"NLinipulation,"  of  values  and 
prices,  575IT.,  5.S9. 

•Manufacturers'  "paper,"  454,  457, 
500,  513,  n. 

" Margins,"  372.  48H,  489,  493,  521, 
n.,  523-26,  528;  "niarjjin  opera- 
tor" as  "hanker,"  3^4-26. 

^LlrKinal  analysis,  24,  51,  440,  Ch. 
XXV;  applied  to  law,  586-89; 
applied  to  money,  152-53,  199, 
20S,  225,  227,451-57,  534. 

Mar);inal    utility,    13,    14-15,    30, 

34-35.  i^<  40.  4-'-  44.  4'>.  49-  ^h- 
V.  137,  440.  n.,  562,  n.,  S70,  583- 
86;  applied  to  value  of  money, 
Ch.  V,  137;  essentially  static 
theory,  io(Al.;  Schumi)cter's  ver- 
sion of,  44,  90tT.,  113,  n.,  fT.,  583- 
86,  limitations  of,  92IT.;  "relative 
niarfdnal  utility,"  113-114,  n., 
115,  n.,  440,  n.;  quantity  thecry 
and,  46. 

"  .Market  letter,"  222,  575. 

Marshall,  A.,  48,  105,  265,  n. 

.Mar.x,  Karl,  12. 

.Mathematical  economics,  91,  n., 
117,  139,  142,  Ch.  \  in,  310,  438, 

.S53- 

McCulloch,  J.  R.,  66. 

.Mead,  Ci.  H.,  4,  n. 

-Meade,  K.  S.,  198,  n.,  202,  n.,  477,  n. 

.Measure  of  values,  133,  150-53, 
201,  265,  n.,  325,  327-28,  391,  417, 
418-23,  436,  .451,  543,  567-69, 
538;  must  have  value,  133,  326; 
relation  of,  to  commodity  theory, 
i5t-C3;  .applied  to  non<'ronomic 
values,  567-69.  See  also  Func- 
tions OF  Mo.VEY. 


Medium  of  exchanRc,  133,  201,  327- 
28,  391,  404,  418.  420-24.  425-26, 
433.  n.,  434,  n.,  436,  442,  543; 
must  have  value,  133.  See 
Fi;n(Tio\s  of  Money. 

MeinonK,  A.,  467. 

Mender,  Karl,  14,  48,  82,  n.,  88,  96, 
n.,  no,  397,  398.  400,  401,  n., 
402-04,  406,  407,  n.,  418,  476, 

493- 
Mercantilism,  225,  551. 
Merriam,  L.  S.,  13,  419,  n. 
Metallist  theory.     See  Commodity 

Theory. 
Middlemen,  effect  of  eliminating,  on 

price  level,  306-07. 
Mill,  James,  66. 
Mill,  J.  S.,  46,  47,  50-52,  55,  n.,  58, 

59,61,67,69,94,129,  132, 161,  n., 

172,   192,   193,  n.,   265,   285,  n., 

319.  n.,  333.  n.,  548. 
MinneafMilis,  bills  of  exchange  in, 

289,  n. 
Mises,  L.  von,  14,  48,  49,  80,  83,  88, 

loo,  109-11,  120,  n.,  182,  n.,  418, 

n.,  429.  n.,  434,  n.,  556. 
Mitchell,  \V.  C,  91,  n.,  179,  n.,  188, 

213,  n.,  265,  n.,  286,  n.,  323,  n., 

329,  n.,  332-34,  i(>3,  412,  n.,  430, 

n.,  448,  n.,  449,  n.,  522,  n.,  533, 

S3f'.  if>8,  574. 

Moue.    See  Suggestion. 

Money,  abstracted  from  by  static 
theory,  99,  265-66,  392;  defini- 
tions of,  167,  169,325-26,495  -96; 
functions  of,  sec  Functions  of 
Money;  must  have  value  from 
non-pecuniary  source,  Ch.  VII, 
326,  390-91.  417.  440.  449.  S9i; 
origin  of,  394,  Ch.  XXI;  money 
not  uniciue,  82-83,  85,  137,  145, 
147,  148,  325,  329-30.  389.  406- 
07,  4«7.  425.  437-SO,  477-78.  S3S, 
542,  544;  peculiarities  of,  3,  57-58. 
64,  69,  71,  74ff.,  78-79,  81-83, 
85,  88,  91,  loi,  124,  Ch.  VII,  132, 
n.,  134,  144-45,  153,  .S92-93, 
Ch.  XXI,  Ch.  XXII,  406,  437fr.; 
tool  or  instrumental  good,  Ch.  IV, 


INDEX 


603 


82-83,  224,  Ch.  XXII,  SOI ;  theory 
of,  developed  in  isolation,  46ff.; 
theory  of,  must  be  dynamic,  262- 
66,  393.  See  also  Status,  Dy- 
namics. Value  of,  vs.  "reciprocal 
of  price-level,"  8,  56-57,  77,  100, 
123,  128-29,  155-56,  3^2-13,  382, 
388-89,  433.  n-,  440.  See  Value, 
Absolute  vs.  Relative.  Relation 
of,  to  credit.  Sec  Credit,  Re- 
serves, Ratio,  1-ixed,  M:M'. 
Relation  of,  to  trade,  Ch.  XIII, 
Ch.  XIV.  See  Trade.  See 
Anal\tical  Table  of  Contents. 
"Money  in  circulation,"  Ch.  VIII, 

173.  i7S.n.,  179. 185- 
Money  economy,  90,  220,  225,  265, 
n-.  397.  399.  ^^-  XXI,  Ch.  XXII, 

5S5- 
"Money-funds,"  distinguished  from 

money,  63,  427,  453.  495-96. 
Money  income,  distinguished  from 
real    income,    89;    distinguished 
from  quantity  of  money,  90,  307- 

310. 
Moneymarket,  32,62,  221,  222,319, 

406,  427,  430,  453-58,  461,  495- 
97,  516-20,  522,  n.,  524,  529-44. 
575-76. 

"Money  Post,"  on  New  York  ^=tock 
Exchange,  372,  375,  430-31- 

Money  rates,  Ch.  V,  145, 149.  183, 
223,  224-26,  316,  319-20,  378, 
406,  428-32,  453-57.  461,  495. 
523-24.  526,  529-30.  534;  w- 
interest  rates.  See  Interest.  Re- 
lation of,  to  bank  reserves,  378;  to 
clearings,  378;  to  international 
gold  movements,  316,  318-20;  to 
dividend  and  interest  payments, 
522,  n.;  to  plans  for  corjiorate 
consolidations,  198;  to  jewelers' 
profits,  454;  to  trade,  223  224, 
226;  to  volume  of  speculation, 
378,  S22,  n. 

"Money  Trust,"  518-20. 

Monism,  unsatisfactory  metaphy- 
sics  for  social   sciences,    571-72. 

Moore,  H.  L.,  237,  n.,  238,  n.,  574- 


Morality,  theories  of,  22-23. 
Moral  values,    22-29,  40,    137-38. 

480,  562,  n.,  567-69.  582,  589. 
Morgan,  J.  P.,  140,  519,  n.,  577; 

J.  P.  Morgan  &  Co.,  343-44,  37Si 

515.  n. 
"Morning  loans,"  376, 377,  509,  510. 

See  "0\t:rcertifications." 

N 

National  banks,  234,  338,  342,  n., 
343.  345.  347.  355.  »'•.  359.  375, 
498-00, 502-03- 
National  City  Bank,  375,  521,  n., 

540,  n. 
Negative  values,  as  "real  costs,"  71, 

n. 
New  York  City,  233-35,  259,  259,  n., 
34ofI.,  383,  392,  430-31.  439.  n., 
502,  503.  506,  5",  S14-16,  520, 
341-42;  as  "clearing  house"  for 
country,  236,  353^.:  contrasted 
with  London,  541-42;  "depos- 
its" in,  233,  34ofT.,  392,  515;  "all 
other  deposits"  in,  235-37;  Cotton 
Exchantre,  252,  503,  541;  Coffee 
Excha :  ^e,  25  2, 268, 503, 541 ;  Stock 
Exchange.  Sec  Stock  Exchange. 
Money  market.  See  Money 
Market.  Clearings.  See  Clear- 
ings. 

Newcomb,  Simon,  156. 

Nicholson,  J.  S.,  81-82,  124,  "9- 
32,  134,  151, 167,323-29. 

"Nominalism"  in  monetarj'  theor>-, 
433,  n.,  fl.    See  Staatliche  Throrie. 

"Normal  tendency,"  176,  218,  254, 
26.-66,  293,  298-99,  315,  392-93, 
395,  S36ff.;  "normal  vs.  transi- 
tional." See  "TRANsmoN  Pe- 
riods," Statics,  Dynamics. 

Norton,  J.  P.,  179,  "•.  287,  n. 

Note-brokers,  496-97, 499. 

O 

"Odd  lot"  dealings  in  securities,  249. 

370- 
"One  house  bonds,"  147. 


604 


INDEX 


Origin  of  money,  304,  Ch.  XXI. 

Ornament,  and  origin  of  money, 
4o8ff. 

Orthodox  economist,  258,  -49,  5(k). 

"Other  collateral  security,"  ana- 
lyzed, soiff. 

"Other  loans  and  discounts,"  ana- 
lyzed, sooff. 

"Overcertilication,"  200,  376,  soq, 
510.      See  "MoRNi\<;  Loans." 

Overcounting  in  estimates  of  vo'  me 
of  trade,  t68,  n.,  200,  n..  i^c  ,3- 
45,  247,  n.,  255,  339-40,  3  ^-81. 

See  U\DKR(  OINTIXC. 

Overproduction,  258,  550. 
"Over    the    counter"    dealings   in 
securities,  249,  370. 


Panics,  174,  273,  435,  446,  448,  520, 
548-49,  555.  See  Crisks,  Busi- 
Nizss  Cycles. 

Paper  money,  143,  150,  151,  418, 
421,  473,  495,  496,  538;  incon- 
vertible, 57,  84,  108,  132,  134, 136, 
140,  n.,  141,  i2\-2i,  391;  cretlit 
theory  of,  141,  146.  See  (Jreev- 
BACKS,  Austria. 

Parasi  '.c  (Kcuputions,  482;  gold 
mining  as,  262,  n.;  American 
banking  as,  527. 

Patten,  S.  N.,  558,  n. 

Paulsen,  F.,  22. 

Payments,  177-/8,  338.  3''7.  "•; 
proportions  of  money  and  checks 

in,  174.  338.  383.  447.  44Q,  4f>3; 
wage,  174,  ,531;  relation  of,  to  vol- 
ume of  trade.  See  Ovkrcocxting, 
Undercoixtinc.,  Barter. 

Pay  rolls,  money  for,  174,  349. 

Pearson,  Karl,  237,  n. 

Perry,  R.  B.,  3,  n.,  16.  n.,  21,  n.,  25, 
n.,  .)7.  n.,  117,  n.,  118,  n.,  119,  n. 

Persons,  \V.  M.,  241,  n.,  270,  n. 

Phillips,  (".  \.,  174,  n. 

Philips,  Osmund,  272,  n.,  353,  n., 

354-  n- 
Physiogra|)hic  factors  in  social  life, 

57«-73.  574.  .S90. 


Pierson,  N.  0.,  221,  n. 

Pittsburg,    "deposits"   in,    245-46. 

"Platform"  of  quantity  theorists, 

iSS- 

Poker  chips,  132. 

Poi)e,  J.  E.,  316,  317,  319,  n.,  502, 
n.,  504,  n.,  505. 

Populists,  and  quantity  theory,  141. 

Positive  doctrine,  in  Parts  I  and  II, 
summarized,  Ch.  XX. 

"Power  in  exchange,"  9-10,   388. 

Pragmatism  in  economic  theor\-, 
41-42,  93,  96-97,  98-99,  553.  571- 
72- 

Pratt,  S.  S.,  248,  n.,  251,  n.,  252,  n., 
3<J9.  370,  374,  476,  n. 

Premium,  146,  194,  ^22,  332,  390, 
442-50,471.  See  .Adiu.  (lold,  w. 
general  |)rice  level  as  index  of 
value  of  money,  194. 

Prestige  as  economic  power,  33,  37, 
41,  405,  409,  411.  438-4^.  463. 
465-66,  487,  489,  570;  prestige 
values.   See  Values. 

Pri'  J,  The<xiore,  222. 

Price,  /fl.,  388,  440,  n.;  and  value, 
8fT.,  298.  Sec  Value.  "Buying 
price"  vs.  "selling  price,"  402- 
04,  40<]-o7,  476;  "just  price," 
24. 

Price  level,  56,  86,  87,  Ch.  VI,  Ch. 
VIII,  188-89,  Ch.  XV,  315-17, 
328,  381-82,  388-89,  416,  416,  n., 
456,  520-23;  relation  of,  to  par- 
ticular prices,  156,  183,  295,  311- 
«i.  3«S-i7.  388-89;  ueighkd 
average,  tied  to  T,  163(1.,  363, 
381-82;  sup|)osed  "passiveness" 
of,  126,  186,  187,  192,  290,  Ch. 
XV,  389;  "reciprocal  of,"  vs. 
value   of  money.     See   Money, 

V^\LUE  OK. 

Price-theory  vs.  value-theor>',  49, 
78,  389.  558-50,  570-77,  589-90. 
See  SuiM'LY  AND  Demand,  Cost 
OF  Proiuxtion,  Capitalization 
Theory,    Impitatton    TireoRV, 

Prices,  concatenations  of,  112-13, 
300,  310,  313-14;  customary,  144; 


INDEX 


60s 


fluid,  143;  world  prices,  and  gold 
production,  Ch.  XVIII. 
Private  banks,  ,u»,  343-45.  348. 
35S.  n.,  357.  4«8.  498-99.  514-16. 
527-28,  531;  dejwsits  in,  in  New 
Yorit  City,  344.  5 15;  "deiwsits" 
in,  in  New  York  City,  343-4S» 

5 1 5-16. 
Produce  exchanges,  200,  25 iff.,  40^1, 

541.     See  SpKdLATION,  COMMOIJ- 

iTY,  CmrAoo  Board  of  Tradk, 
Lo.NDON  Money  Market,  New 
York  Cotto.s  F;xrHANGE,  etc-. 

Production,  confuseti  witli  trade. 
See  Trade.  Relation  of,  to  trade, 
2S7ff.,  269,  3Q3;  e-vchange  as.  Sec 
Exchange.  Factors  of,  268,  481- 
82;  index  of,  278;  money  as  instru- 
ment of.    Sec  Money. 

"Productive,"  meaning  of,  257,  sqi. 

Prosperity,  theory  of,  262,  395,  548, 
5.i5,  S5f>.  569.  573ff-  See  St.\T- 
irs,  Dynamics. 

Protective  tariffs,  550-52,  S53.  s8o- 
81. 

Pujo  Committee,  344,  373,  n.,  37s, 
4QI,  n.,  515,  n.,  518-19. 

"Purchasing  jHiwcr,"  Q-io,  88,  98- 
99,  484;  of  money,  86,  88, 155-56, 
388,  583-86. 


Qualitative  vs.  quantitative  think- 
ing, 191-92,  195,  324,  433,  n.,  553, 
586-88,  SQO.  See  JiRisTic  vs. 
KcoNOiiu;  Thinking. 

Quantity  theor>%  42,  79,  81,  99,  1 10, 
Pt.  II,  esp.  Ch.  XV,  435,  n.,  444, 
n.,  448-49,  478,  52o-^S>  537ff-, 
550,  558,  n.;  modicum  of  truth  in, 
195,  330,  448-49;  as  basis  of  pre- 
diction, 334-35;  doctrine  of,  that 
quantity  of  money  is  of  nt»  im- 
|X)rtance,  219,  219,  n.,  Ch.  XIII, 
passim,  265,  391-92;  conflicts  with 
other  theories,  see  Supply  and 
Deiiam),  Cost  of  Production, 
Capitalization  Theory,  Impu- 
tation Theory,  Cresham's  Law. 


"Long  run"  vs.  "short  run"  ver- 
sions of,  170-71,  188-89,  iQ^ff-, 
262,  393;  not  a  functional  theory, 
262-66,  400-401;  not  logically 
related  to  bimetallism,  219,  n.; 
applied  to  international  trade,  61, 
129,  183,  280-81,  292,  Ch.  XVI; 
not  related  to  general  theory  of 
value,  46ff.,  305;  psychological 
assumptions  of,  143-44.  305,  444; 
relation  to  medium  of  e.xchangc 
function,  152,  266;  contrasted 
with  commodity  theor>',  Ch.  VII, 
esp.  151-53;  types  of,  Ch.  VII, 
Ch.  VIII,  172.  177.  n.,  182-85, 
192-94,  210,  n.,  216-17,  218,  n., 
219,  n.,  220,  Ch.  XVIII,  521,  n., 
S22,n.,  537,  538,  n.  SeeRicARDO, 
Ml-i-,  J.  S.,  Taussig,  Nicholson, 
Fisher,  Walker,  F.  A.,  John- 
son, J.  F.,  Jevons,  Barbouk, 
Andrew,  Dave.vport  (p.  218,  n.), 
Kemuerer. 


Railway  gross  receipts,  240-41,  278, 
516;  relation  of,  to  clearings,  240- 
41. 

"Ranks"  or  "orders"  of  goods,  34, 
38,  96,  481,  562,  n.  See  Imputa- 
tion Theory,  Austrian  School, 
Capitalization  Theory. 

Ratio  of  exchange,  6ff.,  25,  92,  388, 
584;  abstract,  as  value,  25,  92. 
See  Value,  Absolute  w.  Rela- 
tive, Price,  "Purchasing 
"Power  *' 

Ratio,  fixed,  M:M',  Ch.  IX,  187, 
206,  281,  288,  290,  294,  328-29, 
529-44.  See  Reserves,  Depos- 
its, "Money  in  Circulation." 

Real  estate  trade.    See  Trade. 

Rediscounting,    490,    494,    518-20. 

Riiihsbatik.    See  Germany. 

Religious  values,  414. 

Rent,  316.  439-41;  as  cost,  70;  of 
money,  as  "money  rates,"  Ch.  IV, 
145,    149,   424,    438-42,   451-57; 


6o6 


INDEX 


capitalization  of.  See  Capitali- 
zation. 

Reserve  cities,  233,  343,  n.,  357, 
359.  n. 

Reserve  function  of  money,  Ch. 
XVIII,  418, 4»i,  4*4. 436,  536-44; 
^Mcial  case  of  "bearer  of  options" 
function,  426,  n.,  536(1.  See 
FoNcnoNS  OF  Money. 

Reserves,  Cli.  IX,  Ch.  XVIII,  393, 
395.  447.  451.  491,  517,  5»9-44; 
bills  of  excliange  as,  181-82,  444; 
legal  reserve  requirements,  175, 
n.,  184,  447,  448,  449;  ratio  of,  to 
deposits,  17s,  n.,  179,  286-87,  *98, 
324fl.,  529-44;  ratio  of,  to  "money 
in  circulation,"  1 75,  n. ;  relation  of, 
to  money  rates,  378;  "secondary 
reserves,"  530. 

Resumption    of    qjecie    payments, 

146,  3»3- 
Retail  "deposits,"  see  "Deposits." 
Retail  trade.    See  Trade. 
Ricardo,  David,  47,  50,  51,  64,  65, 

66,  106,  131,  sso. 
Ridgeway,  W.,  407,  n. 
Ripley,  W.  Z.,  275. 
Risk,  67,   527,   542-43-     See  Dy- 
namics, "Rearer  of  Options." 
Ross,  E.  A.,  37,  568,  S7I. 
Royce,  J.,  18,  n. 
Rupee.    See  India. 
Rural  banks,  232-35,  491,  517-18; 

"all  other  deiwsits"  in,  233-35; 

loans  by,  in  Wall  Street,  517-18; 

small  volume  of  transactions  of, 

J35.  342,  n. 


S 


Saleability,  10,  94,  99,  401-07,  430, 
440-41,  453.  475-78,  489.  493IT-, 
524-25,  526-27,  529,  54off.,  591. 

Santos,  coffee  speculation  in,  252. 

Savings  banks,  342,  n.,  409,  473, 
498-99,  523 

Savigny.  F.  C.  von,  24,  308. 

Schumpeter,  J.,  44, 40,  n.,  80, 83, 90- 
100,  III,  113,  n.,  ff.,  264,  n.,  265, 


401,  429,  n.,  484-85.  488,  526, 
549.    554-55.    558,    n.,    583-86. 

Scott,  DR,  78,  n. 

Scott,  W.  A.,  13,  48,  81,  132,  141, 
144,  327,  n.,  418,  n.,  419,  n.,  422, 
n.,  431.  n.,  498,  n.,  501,  n. 

Seager,  H.  R.,  301,  n.,  303. 

Sea  Board  .\ir  Line  Adjustment  5's, 

471- 
Seasonal   changes,    187,    192,   533. 
Seignorage,  131. 
Self,  the,  19. 
Seligman,  E.  R.  A.,  73,  n.,  301,  n., 

418,  n.,  548. 
Selling  costs,  257ff.,  393,  565. 
"Selling  price"  vs.  "buying  price." 

See  "Buying  Price." 
Senior,  N.  W.,  14,  n.,  67. 
Sex,  social  transformation  of,  35-36; 

rflle  of,  in  origin  of  money,  409-13. 
Shakspere,  25. 
Share  sales.   See  Stock  Exchange, 

Clearings. 
Shaw,  A.  W.,  259,  n. 
Silver,  139,  n.,  150,  151,  152,  219, 

221,  n.,  327,  397,  412,  414,  415, 

421, 434;  certificates,  432. 
Simmel,  G.,  loi,  418,  n. 
Single  tax,  318-19.  552.  n. 
Smith,  Adam,  12,  50,  64,  65,  222, 

526-27.  550,  556. 

Smith,  B.  F.,  366,  n. 

Smith,  Munroe,  34. 

Social  control,  Ch.  I,  395,  409,  435, 
n.,  482,  584;  technology  of,  577ff., 
589,  591;  "radiant  points  of,"  37, 
576. 

Social  psychology,  17,  36-37,  143- 
44.  560,  569-70,  577-78,  586. 

Social  value  theory,  Ch.  I,  87,  n., 
98-99.  i37ff-.  158.  279,  310-11, 
Ch.  XX,  402,  n.,  408-16,  433,  n., 
435,  n.,  438-42,  464-67,  469.  480, 
560,  569-82,  586-89;  pragmatic 
character  of,  40-42;  applied  to 
law,  24,  586-89;  applied  to 
morals.  22-24.  589. 

Sodal  ad.jp.tage,  relation  of,  to 
individual  interest,  397-99. 


INDEX 


607 


Social  "consciousness,"  16;  sodal 
expectation,  40Q;  social  forces,  36; 
"social  marginal  utility,"  12; 
social  mind,  7,  12,  34,  87,  n.,  5S7i 
560,  570,  578;  social  objectivity, 
theories  of,  zof.;  social  organism, 
16,  577;  social  "oversoul,"  16; 
"MK'ial  use-value,"  12;  social  w. 
individual  values,  43-45. 

"Socially  necessary  labor-time,"  12, 

IS- 

Society  and  individual,  16-26,  118. 

Soetbeer,  A.,  413,  n. 

Sombart,  W.,  220. 

South  Atlantic  States,  "deposits" 
in,  233,  246. 

Spahr,  C.  B.,  274. 

Specie,  182. 

Si)eculation,  60,  n.,  85,  143,  Ch. 
Xlir,  221,  225,  231,  233-41,  248ff., 
267,  298,  363-64,  38a,  39i,  S03. 
S14-28,  s4off.,  566-67,  579.  585; 
by  manufacturers,  wholesalers, 
and  retailers,  243-44,  252-54; 
commodity,  25 iff.,  379-80,  406, 
503>  540~4'2;  influence  of,  on  bank 
clearings,  237-41;  land,  254;  in 
London,  54off.;  "odd  lot,"  249, 
370. 

Speculators,  31,  249,  263,  322,  488, 
499.  Sn-V,  529.  544;  w-  inves- 
tors.  See  lN\'£S'ni£NT. 

Spencer,  Herbert,  571. 

"Spot"  transactions,  251. 

Sprague,  O.  M.  W.,  174,  n.,  200, 354, 
n.,  378,  502,  n. 

Slaatliche  Theorie,  433,  n.,  fl. 

Stabilizing  the  value  of  money,  152, 
194. 

Standard,  of  deferred  payments, 
326,  391,  418,  436;  of  value,  133, 
201,  390,  418-23.  See  MiASVRE 
OF  Valdes.  Money,  135, 325-26, 
421,  445;  "primary"  and  "sec- 
ondary," 422;  tabular,  152,  436. 

State  banks,  234,  322,  338,  34a,  n., 

343.    34S.    347,   498-99-    505-09; 

collateral  loans  in,  505-06,  507. 

Static  theory,  11, 42,  93,  io6ff.,  176, 


n.,  177,  n.,  Ch.  X,  219,  n.,  223, 
254,  a6a-66,  292-93.  395-96,  403. 
426, 433,  n.,  474, 481,  n.,  485. 487. 
488,  536-44,  Ch.  XXV;  abstracts 
from  money,  99,  265-66,  392;  re- 
lation of,  to  speculation,  263?., 
392,  474;  dynamics  and,  recon- 
ciliation of,  Ch.  XXV.  See  also, 
Saleabiuty,  Liquidity,  Fluid- 
ity, "NoMiAi,  Tkndency,"  Equi- 
LiBKiuii,  "Wealth  of  Nations, 
Theory  of,"  Dynamics,  Transi- 
tion PERioD,pKOSPEKrrY,TaEOKY 
OF,  Good  Will,  "  Business  Cap- 
ital," Friction,  Histokical  w. 
Cross-section  Viewpoints. 

Statistics,  237,  n.,  272,  n.,  Ch.  XEX; 
of  banking  assets,  498,  503-04, 
506,  509-11;  of  bank-drafts  on 
New  York  and  other  centres,  357; 
of  "equation  of  exchange,"  191, 
213,  Ch.  XIX;  of  foreign  and 
domestic  trade,  appendix  to  Ch. 
XIII;  of  gold  consumption,  412, 
n.;  of  money  in  banks,  vs.  money 
in  circulation,  179;  of  money- 
rates,  430-31 ;  of  net  income  of  the 
United  States,  246,  247,  n.,  378; 
of  prices,  278;  of  quantity  theory, 
285,  n.,  Ch.  XIX;  ratio,  loans  to 
deposits,  286-87,  "•;  reserN'es,  178- 
79,  286-87,  n.;  of  speculation, 
248ff.;  of  trade,  aa7ff.,  Ch.  XIII, 
363-81;  "ordinary  trade,"  240- 
47;  f  velocity,  339,  361-63.  See 
Weighting  in  Statistics. 

Stevens,  W.  S.,  199,  n. 

St.  Louis,  246,  252,  389,  n.,  503; 
Merchants'  Exchange,  253. 

Stock  exchange,  31, 145,  254,  aSa,  n., 
369ff.,  406,  458,  491.  S«>.  5ai-»3. 
527.  541.  564;  New  York  Stock 
Exchange,  342,  248ff.,  a68,  344. 
430-31,  514,  5a»-23.  S4i;  clearing 
house  in,  199-aoo,  369-75;  share 
sales  on,  volume  of,  248S.,  531, 
n.,  f;i2,  n.,  541;  share  sales  on, 
correlated  with  bank  clearings, 
237ff.,  516;  bond  sales  on,  249, 


6o8 


INDEX 


370;  "odd  lot"  dealings  on,  24Q, 
370,  374;  security  dealings  out- 
side, 250-51,  514;  compared  with 
other  exchanges,  ^50,  541. 

Stocics  and  bonds,  essential  identity 
of,  460-61,  476-77;  "Ixirrowing" 
of,  145-46,  37«-74.  471-72; 
value  of.    See  V'aluk. 

"Stop   loss"   orders,    ^49,   373,   n. 

Store  of  value,  314,  n.,  408,  418, 
424,  426,  451.  Sic  Fuxcnoxs  OF 
Money. 

Substitutes  for  money.  See  Mo.VEY, 
NOT  U.N'iguE. 

Suess,  Eduard,  413,  n. 

Suggestion,  18,  3(>-37,  97,  "8,  405, 
410, 4U,  464-()6,  s(>o,  570,  577-78. 

Supply  and  demand,   Ch.    II,   80, 

2Q5,  299-300.  3".  n-.  389.  4S3; 
applicable  to  general  price  level, 
299-300,  389;  assumes  fi.\ed  abso- 
lute value  of  money,  S2ff.,  313-14, 
389;  conflicts  with  ({uantity  the- 
oo',  299-300,  310-11,  389;  not 
related  to  quantity  theory,  46- 
47.  59-61,  295;  inapplicable  to 
money,  Ch.  II,  389;  applied  to 
money,  59-62,  325,  453,  n.;  in 
"money  market,"  62-63,  224, 
453 ;  relation  of,  to  cost  of  produc- 
tion, so,  69-70;  relation  of,  to 
marginal  utility,  Ch.  II,  Ch.  V, 
e^.  94-95,  and  114,  n. 


Tabular  standard,    152,  436,  451. 
Tarde,  G.,  18,  37,  466,  568. 
Tanff.     See    Protective   Tariff. 
Taussig,  F.  W.,  48,  49,  107,  123,  n., 

129,    151,  n.,    155,   i82-i)5,    192, 

216,  254,  276,  n.,  379,  532,  537,  n. 
"Ta.xonomy"  in  economic  theory, 

563-64, 565.  566. 
Taylor,  Jas.  li.,  252,  n. 
Taylor,  W.  G.  L.,  13. 
Technology,   571-74,   5/6,   590-91; 

"technology   of   s»KiaI    control." 

.See  Social  Control. 


Tempwral  rrgressus.  See  His- 
torical vs.  Cross-section  \'iew- 
points. 

Thompson,  Hurton,  on  barter  in 
New  York  City  real  estate  deal- 
ings, 198,  n. 

Ticker,  248-49,  373,  n. 

"Till  money."  183,  530.  539- 

Time  credit.  See  Credit,  Futurity, 
Book-credit,     Bills     of     I:x- 

CHANC.E. 

Time  discount,  Ch.  IV,  92,  93,  224. 

See  Interest,  Capitalization. 
Time,  influence  of,  of  money-rates, 

4  28-3  i. 

Timeless-logical  vs.  causal-tem- 
poral, relationships,  403,  548.  See 
Causation,  Statics. 

Token  money,  325,  326. 

Touiset,  A.,  412,  n. 

Trade,  various  meanings  of,  267!!.; 
"domestic"  vs.  foreign,  apfiendix 
to  Ch.  XIII;  "ordinary,"  volume 
of,  241-47,  369. 

Trade,  volume  of,  59-61,  117,  Ch. 
VI,  144,  149,  i59ff-,  194,  215,  Ch. 
XIII,  332,  n.,  339-40, 363-81,521- 
23;  an  abstract  number,  dis- 
tinguished from  concrete  goods, 
161;  a  pecuniary  magnitude,  16- 
64,  271,  277-78;  confusions  of, 
with  production,  or  with  stock, 
22sf!.,  281,  296,  n.,  306-07,  363, 
n.,  521,  n.;  governed  by  dynamic 
causes,  262-66,  392, 474;  quantity 
theory  doctrine  of  causes  govern- 
ing, 217-18,  218,  n.,  240,  255,  256, 
257,  294,  522,  n.;  real  estate  trade 
in,  198,  254,  264,  317;  relation  of, 
to  money  and  credit,  Ch.  XII, 
Ch.  XIV,  391-92,  532-36;  relation 
of,  to  price  level,  160-66,  363, 
381-82,  536;  retail  trade  in,  173, 
184,  232,  242-44,  369,  n.,  444-45, 

447,  448-49,  463,  489,  531; 
speculation  chief  factor  in,  Ch. 
XIII.  Sec  Speculation.  Whole- 
sale trade  in,  232,  243,  244-46, 
253-54.  .469,  n.,  381.     See  also 


INDEX 


609 


u 


Barter,  TRANSAf-noxs,  Pay- 
ments, OVERCOlNTINr.,  UnDER- 
couvriNd. 
"Transactions,  total,"  relation  of  to 
bank  dearinRs,  .u8-S«.  .VS3.  .159. 
n.,  360;  relation  of,  to  "dcfwsits," 

349-Sii  353- 

"Transition  periods,"  Ch.  X,  iQd, 
218,  262-66,  2Q3,  298-00,  302-93. 
S37fr.,  548,  578-81.  580.  See 
"Normal  Ten-denxy,"  Statics, 
Dynamics. 

Trosicn,  319,  n. 

Trust  companies,  338,  342,  n.,  343, 
345-48,  498-90.  505-09,  5 1 6.  n-; 
New  York  City,  "deposits"  in, 
345-48;  clearings  of,  345-47; 
deposits  of,  345,  516,  n.;  col- 
lateral loans  of,  505-07;  reser\'es 
of,  346-47.  531- 

Turgot,  78,  n.,  301,  n. 

U 

UndcrcountinR  in  estimates  of  vol- 
ume of  trade,  168,  n.,  200,  n..  231, 
n.,  364-65,  369-81.  See  Over- 
counting, Barter. 

Underwriters,  32,  488,  523,  n. 

Urban,  W.  M.,  29,  n. 

"Use  theory."    See  Interest. 

Utility.     See   Marginal   Utility. 


Vacuum,  monetarj',  323. 

Value,  Part  I,  388-89  and  passim; 
absolute  vs.  relative,  7fT.,  56-57, 
77-78,  81,  86£f.,  109-110,  123, 
156, 158-59, 303. 312. 328, 388-89, 
402,  n.,  440,  n.,  449;  abstract 
units  of,  451;  exchange  and,  9-1 1, 
4oiff.,  483-84;  wealth  and,  5,  41, 
388;  as  generic,  26,  288,  467; 
dijfcrcntia  of  species  of,  26fT.;  as 
quality,  5,  41,  97-98,  388;  as 
qiLintity,  5,  41,  97,  9.S,  3.S.S;  rnn- 
trol  over,  S75fl.;  causal  theory  of. 
See  Causal  Theory.    Definition 


"f.  5-7.  .?88;  derived,  becomes 
independent,  40,  i37fT.,  391,  480, 
481,  n.,  562,  n.,  563,  n.  See  also 
Impit.vtion  Theory,  Capitali- 
zation Theory,  Ranks  or  Or- 
ders OF  Goods.  Formal  and 
logical  aspects  of,  5fT.,  41,  86,  98, 
388-89,  401-02,  n.;  functions  of, 
10,  27,  43,  57. 87,  n.,  388,  440, 487, 
552,  562,  n.,  572,  585-86;  "human 
nature,"  30,  n.;  "inner  objective," 

13,  88,  no,  402,  n.;  institutional. 
See  Institution  A  l  Values.  "  In- 
trinsic," 24;  "intrinsic  causes  of." 

14,  n.;  objective,  85,  87,  100;  of 
consumers'  goods,  34fl.,  300;  of 
diamonds,  438-42;  of  gold.  See 
Gold.  Of  instrumental  goods, 
38fl.,  297.  3ooff-.  .104.  467;  of 
money.     See   Money  and   .\na- 

LYTIC A  L  T A  B  LE  OF  CONTENTS.     Of 

stocks  and  bonds,  30-31,  32,  3^)- 
41,  30ofT.,  462;  "participation," 
29,  30,  n.;  "personal,"  19,  86,  88, 
89;  "prestige,"  410-11,  438t>2, 
452-53;  "public  economic,"  13, 
86,  88,  89;  "something  physical," 
135;  subjective,  85,  86,  88,  99, 
ICO,  401-02,  n.;  subjective,  in 
e.xchange,  88,  89,  91,  99,  100,  loi, 
112-119,  137,  n.  See  Money, 
Value  of.  Social  Vallt:,  Price, 
Ratio  of  Kxchance,  "Purchas- 
ing Power,"  "Power  in  Ex- 
change," Marginal  Utility, 
Cost  of  Production,  Supply 
AND  Demand,  etc. 

Value  theory  vs.  price  theory.  See 
Price  Theory. 

Values,  concatenation  of,  313-14; 
simultaneous   rise  or  fall   of,   8. 

V^an  -Antwerp,  \V.  C,  372,  n.,  374,  n. 

Van  Hise,  C.  R.,  208,  n. 

Variables  and  constants,  97,  119, 
143-44.  204-05,  256-57. 

Veblen,  T.  B.,  37,  n.,  411,  439,  477, 
r..,  556,  560-64,  569,  570,  580, 
582,  585. 

Velocity  of  circulation,  85,  Ch.  VI, 


.  ^-a. 


6io 


INDEX 


117,  131,  143.  t94.  Ch.  XII,  J90, 
»9a.  a©*,  309.  3«o.  333.  n.,  339, 
361-63,  394;  "coin  transfer"  t.x. 
"peraon-turaover"  concepts  of, 
^3~^i  308;  as  causal  entity,  304, 
30Q,  ata-13,  314;  quantity  theory 
analysis  of  causes  governing,  143, 
203,  aosff.,  309;  most  highlj 
flexible  factor  in  "equation  of 
exchange,"  205;  varies  with  trade, 
aogfiF.,  306-08,  394;  varies  with 
prices,  308-10,  394;  varies  with 
value  of  money,  215;  meaningless 
abstract  number,  204. 

W 

Wagner,  A.,  25,  n. 

Walker,  Amasa,  401,  n. 

Walker,  F.  A.,  46,  62,  169,  170,  n., 
219,  220,  n.,  237,  414,  n.,  419,  n., 
521,  n. 

WaU  Street.  See  New  York  Crrv, 
Stock  Exchange,  New  Yokk 
Crrv  CiBASiNG  House,  Specula- 
tion, Money  Makket,  "Money 
Trust,"  etc. 

Walras,  L.,  91,  n. 

Walsh,  C.  M.,  188,  n. 

Wants,  social  nature  of,  3sff.;  com- 
petitive. See  CoifPETmvE  Dis- 
play. 

War,  108,  140,  n.,  194,  427,  549-51; 
World  War,  136, 139,  n.,  142, 416, 
427,  481,  sai.  530.  55°,  »•;  Amer- 
ican securities  returned  during, 
S2i,n. 

War  loans,  463,  n.,  464,  n.,  480-81. 


Wealth,  440;  definitions  of,  5,  n.; 

relation  of,  to  value,  5;  distrib'; 

tion  of.     See  Distribution  of 

Wealth. 
"Wealth  of  nations,"  theory  of,  262, 

395.  SSf><  569. 
Weighting,  in  statistics,  i63flF.,  229, 

229,  n.,  272,  n.,  341,  361,  383. 
Weston,  N.  A.,  339, 341, 342,  n.,  360. 
Wheat  as  money,  407. 
WhlUker,  A.  C,  65,  154,  319,  n. 
White,  Horace,  209,  211,  345,  n., 

401,  n. 
Wholesale  "deposits."   See"nEP08- 

rre."    Trade.    See  Trade,  Vol- 
ume OP. 
Wicksell,  Knut,  128. 
'  Wicksteed,  P.  A.,  91,  n.,  115,  n., 

116,  117,  214. 
Wicser,  F.  von,  14,  48,  49,  70,  80, 

83-90, 99,  too,  lox,  102,  iw'  ,  109, 

111,308,  n. 
Williams,  A.,  152. 
Williams,  Clark,  347. 
Willoughby,  W.  W.,  18,  n. 
Wilson,  K.  B.,  164,  165. 
Withers,  Hartley,  221,  222,  540,  n. 
Wittner,  Max,  289,  n. 
Wolfe,  O.   Howard,  349,   353.  n., 

359.  n. 
Wolff,  S.,  289,  n. 


xy^'C,  149. 


Yule,  G.  U.,  237,  n. 


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